explains the purpose of an interconnection agreement and where an inter-creditor agreement would be used instead of a priority instrument or subsedation instrument First, payment freezes should be limited to defaults and defaults for which the priority lender has accelerated credit. Other failures, such as. B a breach of financial covenants or failure to provide the necessary borrower certificates should not form the basis for a blocking of payments (unless the priority lender has exercised its right to accelerate the loan). Priority lenders will oppose this position. Secondly, payment freezes should apply for a limited period of time – usually from 90 to 180 days, depending on the type of junior capital. Third, there should be no more than one blockage for a particular failure. Fourth, the total number of permitted blocks should be limited, regardless of the number of failures. Two blocks per year and three or four blocks over the duration of the loan (depending on the duration) are common. Fifth, although the junior lender remits many rights to the senior debtor in the event of bankruptcy, it should ensure that it has basic protection to accelerate its debt and perfect its remedies. Finally, it is important to ensure that the blocking of payments begins. Defaults should result in immediate blocking, but further defaults should only result in a freeze after informing the junior lender. On this point, the interconnection agreement should appropriately reflect the fact that the junior lender must only return payments received after the current blocking date (i.e.
in most cases only after receipt of the notification). While a priority lender will propose that some or all of these safeguards undermine subordination, they are necessary to ensure that the priority lender is not sitting on its rights to the detriment of the younger lender. An effective way to do this is to include these points in the roadmap with the borrower and ask the borrower to clarify them with the existing or proposed priority lender. Whether the main conditions of subordination are contained in a roadmap, request and verify a copy of the intercreditor agreement at the beginning of the transaction. The elimination of time constraints often allows the senior lender to obtain all the necessary permissions to change its form and negotiate for the junior lender and senior Lender a creative solution to a difficult problem.. . . .