Selling mezzanine debt is never as straightforward as selling a pool of unsecured consumer receivables. The intercreditor agreement -- the contract between senior and junior lenders that governs their respective rights, priorities, and remedies -- is the most significant complication. For mezzanine holders considering a sale, and for buyers evaluating an acquisition, the intercreditor agreement is the first document to read and the last one to underestimate.

What Intercreditor Agreements Do

An intercreditor agreement establishes the rules of engagement between lenders at different levels of the capital structure. At its core, it defines payment priority: who gets paid first from the borrower's cash flows and, critically, from the proceeds of any enforcement or insolvency proceeding. But modern intercreditor agreements go well beyond simple priority. They regulate the junior lender's ability to take enforcement action, restrict amendments to the junior loan documents, and may limit or prohibit the junior lender from selling its position without the senior lender's consent.

For mezzanine holders, these restrictions are accepted at origination as the cost of being in a subordinated position. But when the borrower's financial condition deteriorates and the mezzanine holder wants to exit, those same restrictions become the defining constraint on the sale process.

Standstill Provisions and Enforcement Restrictions

Most intercreditor agreements include a standstill provision that prevents the mezzanine lender from taking enforcement action for a defined period after a default, typically 90 to 180 days. During this window, the senior lender has exclusive control over the enforcement strategy. The mezzanine lender can observe but not act.

This standstill has direct implications for any buyer of the mezzanine position. If the borrower is in default when the position is being marketed, the buyer is acquiring a claim that it cannot enforce for the duration of the standstill. The buyer must model the cost of that delay and the risk that the senior lender's enforcement strategy may not align with the junior lender's interests.

Some intercreditor agreements extend beyond a simple time-based standstill. They may prohibit the mezzanine lender from taking any enforcement action at all unless the senior debt has been repaid in full. In these "hard subordination" structures, the mezzanine holder's remedies are effectively limited to waiting for the senior lender to act or negotiating a consensual resolution.

Subordination Waterfalls and Recovery Economics

The payment waterfall in an intercreditor agreement determines how proceeds are distributed when the borrower's assets are liquidated or the business is sold. The standard structure pays the senior lender in full (principal, interest, fees, and enforcement costs) before any proceeds flow to the mezzanine lender.

Buyers of mezzanine positions need to model the waterfall carefully. The relevant question is not the borrower's total asset value but the residual value after senior claims are satisfied. If the senior debt is $80 million and the enterprise value is $100 million, the mezzanine recovery depends on capturing a meaningful share of that $20 million cushion, less the costs of any realization process.

Intercreditor agreements sometimes include provisions that expand the senior lender's priority claim beyond the original loan amount. Protective advance provisions allow the senior lender to make additional advances to preserve collateral value, and these advances receive priority treatment in the waterfall. Mezzanine buyers who fail to account for this expansion risk can overestimate their recovery.

Many intercreditor agreements restrict the mezzanine lender's ability to transfer its position. These restrictions range from simple notice requirements to full consent rights in favour of the senior lender. Some agreements limit transfers to "qualified transferees" that meet specified financial and operational criteria, or maintain a list of approved buyers.

For sellers, these transfer restrictions narrow the universe of potential buyers and can slow the sale process. For buyers, they create an additional closing condition that introduces execution risk. A buyer who invests time and resources in diligence only to have the transfer blocked by the senior lender faces a dead deal.

The practical effect: mezzanine debt sales require early engagement with the senior lender. Experienced participants build the consent process into their transaction timeline from the outset, rather than treating it as a post-agreement formality.

CCAA and BIA Implications

When a borrower enters insolvency proceedings under the Companies' Creditors Arrangement Act (CCAA) or the Bankruptcy and Insolvency Act (BIA), the intercreditor agreement continues to govern the relationship between the senior and mezzanine lenders. Canadian courts have consistently upheld intercreditor agreements in insolvency, treating them as binding contracts between sophisticated parties.

For mezzanine holders, this means that the subordination and standstill provisions negotiated at origination will be enforced during the insolvency process. The mezzanine lender's vote on a CCAA plan or BIA proposal may be constrained by the intercreditor agreement, and any distribution under the plan will follow the agreed waterfall.

Buyers of distressed mezzanine positions sometimes acquire the debt specifically to gain a seat at the table in insolvency proceedings, with the goal of influencing the restructuring outcome. This strategy demands a thorough understanding of the intercreditor terms and the dynamics of the specific proceeding -- the priorities of the senior lender, the debtor, and any other stakeholders.

Canadian insolvency proceedings create specific tactical considerations for mezzanine holders. Under the CCAA, the court-appointed monitor has broad authority to oversee the debtor's affairs and make recommendations on the restructuring plan. The mezzanine lender's ability to participate in the process, file a proof of claim, vote on the plan, and object to specific provisions depends on how the intercreditor agreement interacts with the statutory framework. In practice, the monitor and the court will respect the contractual subordination and waterfall provisions when determining distributions, but the mezzanine holder retains the right to appear and be heard on matters affecting its interest. Some intercreditor agreements go further and restrict the junior lender's right to vote on or oppose a CCAA plan if the senior lender supports it. These "drag-along" or "deemed consent" provisions can effectively eliminate the mezzanine lender's voice in the restructuring process.

For sellers marketing a mezzanine position during active insolvency proceedings, timing is critical. The value of the position shifts as restructuring milestones are reached: the initial stay order, the DIP financing approval, the filing of a plan, and the sanction hearing each alter the risk and recovery profile. Experienced buyers track these milestones closely and adjust their bids accordingly. A seller who waits until after an unfavourable plan is filed has less leverage than one who sells early when multiple restructuring outcomes remain possible.