An intercreditor agreement (ICA) is a legal contract between two or more lenders who have provided loans to the same borrower. This agreement outlines the rights, priorities, and obligations of each lender with respect to the borrower`s assets and payments.
The ICA is especially important in the case of a borrower defaulting on their loans, as it specifies how the lenders will work together to recover their investments. This is where the Priority of Interests and Payments (PIB) comes into play.
The PIB is a key element of the ICA that determines the order in which the lenders will receive payments from the borrower`s assets. It establishes a hierarchy of seniority among the lenders based on the type of loan, collateral, and other factors.
For example, a first-lien lender would have priority over a second-lien lender, meaning that they would be repaid first from the borrower`s assets in the event of a default. Similarly, if there are multiple first-lien lenders, their seniority would be determined by the order in which they provided their loans.
The PIB also outlines the distribution of proceeds from the sale or liquidation of the borrower`s assets. In the case of a default, the assets would be sold and the proceeds would be distributed among the lenders according to the PIB.
The ICA and PIB are important tools for lenders to protect their investments and minimize risk. They provide clarity and structure to the relationship between lenders and borrowers, ensuring that everyone knows their rights and obligations.
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