Australia: What a mezzanine lender wants in an intercreditor deed

Mezzanine lenders

On some transactions, mezzanine lenders play a crucial role to bridge the funding gap between equity and senior debt. Immediately post GFC, senior lenders became less inclined to allow payment of mezzanine debt or to permit restrictions on the senior lender's priority, viewing mezzanine debt as a form of equity with the corresponding risk and reward. However, the market for mezzanine debt has since evolved, and now, it is not uncommon for mezzanine lenders to push to retain some protections in relation to their outstanding debt and security.

What follows below are, from a senior lender's perspective, some of the more common concessions requested by a mezzanine lender.

Subordination deeds, priority deeds and intercreditor deeds

There is, at times, confusion regarding these three types of documents and it is not uncommon for these documents to be referred to interchangeably. However, each is distinctly different:

  • Subordination deeds: set out the payment arrangements between two or more creditors, in respect of the order of payment of each creditor's debt. Subordination deeds can apply to both unsecured debt and secured debt where the security held by each creditor do not overlap.
  • Priority deeds: deal with the situation where two or more creditors hold security over the same assets, and contractually determine which creditor's security has priority over the other. Priority deeds do not regulate payments to creditors prior to a default or enforcement of security, but rather, govern the enforcement process between the creditors after a default and how enforcement proceeds will be applied.
  • Intercreditor deeds: are essentially a combination of both a subordination deed and a priority deed, and are used where two or more creditors wish to regulate both the payments from the borrower and the overlapping security held by each creditor.

Permitted payments

A typical bargaining position adopted by a senior lender is that no payments to the mezzanine lender are allowed without the prior consent of the senior lender. Whilst this approach is still common, where the mezzanine lender is a genuine third party financier, senior lenders may agree on a permitted payment regime which allows certain payments to be made to a mezzanine lender. Typically, these payments will be limited to interest and upfront establishment fees and costs, and cannot be paid if certain conditions are triggered, such as:

  • the occurrence of an event of default under the senior lender's finance documents;
  • the senior lender has issued a stop notice in respect to payments;
  • the borrower being overdue on any payments to the senior lender;
  • breach of a financial covenant (either under the senior finance documents or a more onerous covenant set for the purposes of permitted payments);
  • an insolvency event occurs in respect of an obligor; or
  • a cap on interest payments to the mezzanine lender has been reached.

The scope of the above conditions are subject to negotiation between the parties, and may include detail such as whether a mezzanine lender can retain 'catch up' payments of interest where payments were stopped temporarily but then subsequently resumed. Depending on the type of transaction, permitted payments may not be appropriate during certain periods of the transaction, for example, during the construction phase of a development transaction.

Note that payments of any principal to the mezzanine lender are usually not permitted until the senior debt is fully repaid. Although, in some cases, if scheduled payments of principal have been agreed between the Borrower and the mezzanine lender, some senior lenders will allow those to be made provided there is no event of default under the terms of the senior finance arrangements (or subject to other conditions).

Restrictions on senior debt

Senior lenders may cringe at the thought of any restrictions on their debt imposed by a mezzanine lender. However, changes to senior debt (particularly the quantum that ranks ahead of a mezzanine lender) is a real risk to the mezzanine lender and the financial viability of the funding they provide. A mezzanine lender may request certain restrictions on senior debt such as:

  • cap limits on the amount of priority senior debt that can rank ahead of the mezzanine debt;
  • limits on the senior lender increasing the margin of its debt (other than by way of default interest) or fees payable;
  • limits on amendments to amortisation of debt or deferral of interest or principal payments;
  • limits on any extension to the maturity date of senior debt;
  • restrictions on the senior lender taking additional security or guarantees;
  • priority to reduce with any principal reductions; or
  • restrictions on transfer or assignment of the senior debt.

These restrictions are more commonly seen in respect of highly structured or leveraged transactions, however, some elements, such as limits on increases to margins and fees, are being increasingly requested on more 'regular' transactions.

Enforcement rights and standstill periods

The right for a mezzanine lender to accelerate repayment of its debt or enforce its security is usually postponed under an intercreditor deed, even where an event of default has occurred and subsists under the mezzanine finance documents. The postponement of enforcement rights means that the mezzanine lender is left with no mechanism to act on a default unless the senior lender decides to take action.

To avoid being held in abeyance indefinitely, the mezzanine lender may seek to include a standstill arrangement in the intercreditor deed. Under such an arrangement, the mezzanine lender can notify the senior lender of its intention to accelerate its debt or take other enforcement action. Upon delivery of the notice, if the senior lender does not take enforcement action and the default subsists after expiry of a specified 'standstill period' (which may be a period of 90, 120, 150, or 180 days, or even a variable combination depending on the type of default), the mezzanine lender is entitled to take enforcement action.

Standstill arrangements essentially force the senior lender to act on borrower defaults, either by commencing enforcement action or by waiving the default (if it is within the power of the senior lender to waive that default). Consequently, the senior lender should seek the longest standstill period it can reasonably obtain, taking into account the identity and credit worthiness of the borrower or project, the type of industry and the available internal resources of the senior lender.

Cure rights

A mezzanine lender may seek the right to cure defaults under the senior debt to avoid acceleration of the senior debt, the charging of default interest, and enforcement of the senior lender's security, all of which are events which may jeopardise the full repayment of the mezzanine debt. Ordinarily, cure rights for a mezzanine lender are limited to payment defaults and financial covenant breaches, by way of injection of additional mezzanine debt (or perhaps equity).

For a senior lender, cure rights create a layer of additional risk, as the injection of more debt may not necessarily cure underlying financial problems of the borrower's business or project. Instead, adding further mezzanine debt may simply 'kick the can down the road' and postpone the senior lender's right to take action following a genuine 'first warning sign' default. If agreeing to cure rights, the senior lender should add certain restrictions to those rights, such as a maximum number of 'cures' per financial year, and that a cure can only be applied to one instance of the same default.

Buy out rights

The inclusion of a 'buy out' right for the mezzanine lender to purchase the senior debt at par is becoming increasingly common in intercreditor deeds. Prima facie, a buy out right seems like a win-win situation for all parties; with the senior lender able to exit the troubled transaction at par, and the mezzanine lender (who has a higher risk profile) being able to take charge of its own destiny on the deal.

However, a buy out right also means that the senior lender surrenders the economic upside of being in the transaction, and so the senior lender must negotiate to retain some discretion as to when it is willing to exit the deal. Usually, a subsisting default under the senior finance documents is the trigger for a mezzanine lender to exercise a buy out right. The timing for the subsisting default, the ability of the senior lender to give a waiver (and therefore veto the buy out right), and the calculation of buy out price, are all matters to be negotiated in a buy out clause.

The borrower should also be wary of buy out rights contained in intercreditor deeds. Depending on their relationship with the mezzanine lender, a buy out right may mean the borrower becomes beholden to the sole demands of the mezzanine lender (as opposed to a senior lender who may act more generously upon a default).

Negotiating with a mezzanine lender

When negotiating an intercreditor deed, senior lenders should keep in mind that in Australia, there is no 'market standard' or 'market principles' that dictate how a senior lender should negotiate the intercreditor deed. Ultimately, the bargaining position of the mezzanine lender, which will depend on numerous factors including their role in enabling the transaction and their connection with the borrower or sponsors, will steer negotiations and which concessions (if any) a senior lender will agree to. The final outcome is deal contingent, and consequently, engaging an experienced legal adviser is essential to ensure a suitable outcome is reached for the senior lender.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions