Intercreditor Standstills: What Mezzanine Lenders Agree to Wait For

A basic subordination agreement mainly settles payment priority. An intercreditor agreement between a senior lender and a mezzanine lender does that too, but adds a fuller rulebook governing the relationship between the two creditors specifically during a default: how long the mezzanine lender must wait before taking any enforcement action, what happens to payments during that period, whether the mezzanine lender gets any voice in amendments to the senior debt, and often a mechanism for someone to simply buy out the mezzanine position rather than let both lenders pursue remedies at once.

The standstill period restricts the mezzanine lender from exercising its own remedies, like accelerating its loan or pursuing collateral, for a defined period after a default, giving the senior lender room to work through its own response first without a second creditor complicating the situation. This period is heavily negotiated, since a longer standstill favors the senior lender's control over the process, while a shorter one gives the mezzanine lender more ability to protect its own position sooner if the senior lender isn't moving toward a resolution.

The two lenders, not the company, are the ones negotiating this length, but it's worth understanding as the borrower anyway, since it tells you roughly how much time a workout process has before a second creditor can start taking its own action alongside whatever the senior lender is already doing.

A standstill limits enforcement action; a payment blockage is separate and more immediate, stopping the company from making any payments to the mezzanine lender for a period after a senior default, even interest payments that would otherwise be current. Some intercreditor agreements let the senior lender trigger payment blockage more than once within limits, which matters for how the mezzanine lender models its expected cash flow, since a blocked payment doesn't disappear, it typically accrues, but delayed cash is still a real cost.

A lot of intercreditor agreements give the senior lender, or sometimes a third party, the right to buy out the mezzanine debt at par plus accrued interest during a standstill period, effectively removing the second creditor from the situation entirely rather than negotiating around it. This provision protects the senior lender from a drawn-out multi-creditor workout, and it gives the mezzanine lender a defined exit at a known price if a restructuring drags on, rather than an open-ended wait with no resolution in sight.

If you're the company, you're not typically a party negotiating the intercreditor agreement directly, since it's between the two lenders, but its terms still shape how a default plays out for you, so ask to see it and understand the standstill length, payment blockage triggers, and buyout mechanics before you're relying on any of them during an actual crisis. Knowing which lender controls the process, and for how long, changes who you should be talking to first if trouble ever does arise.

Ask your senior and mezzanine lenders directly, at closing, to walk you through how each stage of a hypothetical default would actually unfold under their intercreditor agreement. Most lenders are willing to have this conversation proactively, and it's a far better time to learn the sequence than in the middle of an actual covenant breach.

Ask to see the agreement and confirm these terms:

• The standstill length, since a longer period favors the senior lender and a shorter one favors the mezzanine lender.
• The payment blockage triggers, including whether the senior lender can trigger blockage more than once within set limits.
• The buyout mechanics, including who can purchase the mezzanine debt at par plus accrued interest during a standstill period.
• Whether the company signs as an acknowledging party, and how the agreement treats amendments to the senior debt.