When structuring complex loan financing, financiers must consider whether to replace unsecured and structurally subordinated “mezzanine” debts in the capital hierarchy with a second secured mortgage. The relatively lower cost of financing dual-bond credit is based on the assumption that the second pawn bonds could obtain some capital value on the remaining guarantees that would otherwise not be available with such “mezzanine” debts. Applications for second-wage status occur even when these lenders have their own credit facility and need these pledges to increase their credit base. In exchange for such status, high-level lenders often require these pledges to be a “silent second” with minimum or non-existent enforcement rights. A duly developed inter-credit agreement between the parties to the transaction is necessary to ensure that their relative rights and obligations are applied in the event of an emergency or bankruptcy. Priority between two secured creditors is necessary if both have security interests on the same guarantees. The reason is that the primary lender will strive to be repaid first on the collateral income when the pledge is applied, while the junior lender expects to recover only the remaining income. If the proceeds of the guarantee are not sufficient to fully repay the priority lender, both secured creditors and all other unsecured creditors would equally rank in their right to repay the remaining debts of the debtor`s other assets. The terms of payment contained in the interbank agreement mitigate this result in favour of the priority creditor. The payment sub-settlement allows the principal creditor to first deduct all assets of the debtor or another debtor, be they security. The amount owed to the principal lender gives rise to subordinated terms of payment, not the value of the mortgaged collateral.
As a general rule, the provisions of the interbank agreement require all parties to pay all proceeds of the common guarantee to the priority creditor or his representative. Another fundamental principle of intercreditator agreements is that the principal creditor is generally entitled to control the maintenance and transfer of common security, while the subordinate creditor is required to waive certain legal rights that would otherwise give the subordinate creditor the right to challenge the enforcement and enforceable execution procedure.