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An intercreditor agreement is a legal document that outlines the relationships between different creditors in a lending context. These agreements are critical when a borrower has taken out loans from multiple lenders.

One common type of intercreditor agreement is the first-lien and second-lien intercreditor agreement. This type of agreement is often seen in the context of asset-based lending.

In asset-based lending, the borrower pledges certain assets as collateral for the loans. The assets could be inventory, accounts receivable, or real estate. The lender typically takes a security interest in the assets, which means that the lender can seize the assets if the borrower defaults on the loan.

Asset-based lending can take several forms. A borrower may have several loans secured by the same assets. The loans may have different priorities, depending on when they were made and what the lenders agreed to. This is where a first-lien and second-lien intercreditor agreement becomes important.

In a first-lien and second-lien intercreditor agreement, the creditors agree on the priority of their security interests. Typically, the first-lien lender has the senior security interest. If the borrower defaults, the first-lien lender has the right to seize the collateral and sell it to repay the loan. The second-lien lender comes next in the priority chain. If there is anything left after the first-lien lender is repaid, the second-lien lender can seize the remaining collateral.

The intercreditor agreement outlines how the lenders will work together in the event of a default. It determines who has the right to approve or veto certain actions by the borrower, such as selling assets or taking on new debt. It also specifies how the lenders will share the proceeds of any sale of the collateral.

One of the challenges in drafting a first-lien and second-lien intercreditor agreement is balancing the needs and interests of the different lenders. The first-lien lender typically wants to have as much control as possible, while the second-lien lender wants some protection in case the first-lien lender makes a mistake or is unable to collect on its loan.

Overall, a well-drafted intercreditor agreement is essential for lenders in asset-based lending. It helps to avoid disputes and ensures that the lenders are repaid in the right order if the borrower defaults. If you are entering into an asset-based lending transaction, make sure to have an experienced lawyer draft an intercreditor agreement that protects your interests.