If a company obtains another loan against its existing guarantees, it will convince the first lender to be subordinated to the new loan, or receive a new loan subordinated to the first. In both scenarios, lenders use a subordinate agreement to sketch out the terms between them. Some priority lenders may include a standstill clause or clause to protect their interests. If this is the case, the resulting agreements are called subordination and status quo agreements. The duration of the standstill period is usually negotiated, as younger, priority creditors have competing interests. As a general rule, the recreated creditor will prefer a shorter standstill period, as it will endeavour to initiate co-enforcement measures in the event of late payment. However, the priority creditor will generally prefer a longer standstill period, which will give it more time to implement its own collateral implementation strategy. While the duration of the shutdown varies, most are between 90 and 180 days. Several factors are specific to the circumstances of each transaction and can influence the length of the standstill period, including: a subordination agreement is an agreement between two lenders – a priority lender and a younger lender. The junior lender readily agrees to subordinate his right to all or part of the assets of a company to a priority lender.
This means that the priority lender has the first right to the assets if the company is in default or bankrupt with both loans. Priority lenders, who are forced to tackle problematic loans with borrowers and other subordinated creditors, should verify and understand the extent of the lock-in or standstill periods provided for in their subsedation agreements at an early stage of the formation process. If a priority lender takes action without verifying the subhesity or existing interconnection agreement, the lender may either breach the agreement and possibly create additional problems with the borrower and/or subordinated creditor, or disregard the conditions precedent required in the document in order to protect and preserve the rights and priority of the priority lender. As a rule, senior Lender uses standstill provisions to deviate in case a company is only late in the junior loan if it limits the probability of this default as relatively high. Senior Lenders also requires a standstill clause if junior Lenders` shares may compromise Senior Lenders` guarantees or refund. For example, the loan agreement for a junior loan may provide that the lender has the right to access the first position for certain guarantees in order to heal the failure of a business. This would undermine the guarantee position of the priority lender….