Lien Subordination versus Debt Subordination

Summary

The scope and nature of an intercreditor agreement depends on the types of financing involved. At the outset of discussions, counsel should identify whether the parties intend (1) “debt subordination,” where the debt owing to one creditor is subordinated in right of payment to the debt owing to the other creditor or (2) “lien subordination,” where each of the creditors is secured and the lien of one creditor has priority over the lien of the other creditor in the same assets of the borrower. While for both debt subordination and lien subordination an intercreditor agreement is used since the agreement in both cases is between creditors, it is common to refer to an agreement providing for debt subordination as a “subordination agreement” and an agreement providing for lien subordination as an “intercreditor agreement.”