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Subordination agreements are used to legally establish the order in which debts are to be repaid in the event of a foreclosure or bankruptcy. In return for the agreement, the lender with the subordinated debt will be compensated in some manner for the additional risk.
In a typical intercreditor agreement, lenders with competing liens claim the proceeds of collateral, while an AAL covers all collateral proceeds and all payments received under the credit documents.
A Subordination Agreement is a narrow form of Intercreditor Agreement that focuses on the priority of two or more creditors' debts and claims concerning a borrower with multiple loans and common security interest. It is also known as a Priority Agreement.
Parties often use the terms Intercreditor Agreement and Subordination Agreement interchangeably, although the broader category of Subordination Agreements as a stand-alone agreement usually covers subordination and payment seniority such as, for instance, in transactions involving an unsecured credit facility.
An Intercreditor Agreement documents the rights and obligations of two or more creditors when working with a shared borrower; these include priority of claims on loans and collateral.