Intercreditor agreements are legally binding contracts that regulate the relationships between lenders and other creditors in the event of a borrower's default. These agreements establish a hierarchy of payments and priority of claims, among other things, to protect the interests of each creditor. One of the key provisions of an intercreditor agreement is the turnover of receipts, which determines how cash flow from the borrower's assets will be distributed among the creditors.
In simple terms, turnover of receipts refers to the process by which a borrower's income or revenues are turned over to its creditors to pay off outstanding debts. This provision is particularly important in situations where the borrower has multiple creditors with competing claims on its assets. The turnover of receipts clause defines how cash generated by the borrower's assets will be allocated among the various creditors.
Typically, an intercreditor agreement will specify that cash flow from the borrower's assets will be applied in a certain order of priority. For instance, the first priority might be to pay operating expenses such as salaries and rent, followed by payment of secured creditors, then payment of unsecured creditors. The turnover of receipts provision will dictate how much cash will be allocated to each category of creditors, based on the hierarchy established in the agreement.
The turnover of receipts provision may also include carve-outs or exceptions to the general priority scheme. For example, the borrower may be allowed to retain a certain amount of cash flow for working capital or other purposes, or certain creditors may be given priority over others for specific types of payments. These carve-outs can be complex and should be negotiated carefully to ensure that each creditor's interests are protected.
It is important to note that the turnover of receipts provision may only apply in the event of a borrower's default. If the borrower is able to meet its obligations to all creditors on time, the turnover of receipts clause may not come into play. However, in situations where the borrower is experiencing financial distress, the turnover of receipts provision can be crucial in determining how cash flow will be allocated among the creditors.
In conclusion, the turnover of receipts provision is a critical component of intercreditor agreements, which can significantly impact the distribution of cash flow among creditors in the event of a borrower's default. Creditors must carefully negotiate this provision to ensure that their interests are protected and that they receive a fair share of the borrower's cash flow. By understanding the turnover of receipts clause and its implications, creditors can make informed decisions when entering into intercreditor agreements.
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About the author
Sabbir Rahman is Managing Director of Langdon Capital and a Partner at Bridging Funding. He has held prior roles with Morgan Stanley, Lazard and Barclays Investment Bank. He has executed over £60 billion in notional value of transactions across financing, M&A and derivatives with global corporates, private equity funds and financial sponsor groups.
About Langdon Capital
Langdon Capital provides in-house transaction services to C-suites and Boards of publicly-listed and PE-backed businesses during the negotiation, execution and due diligence of corporate finance and capital markets transactions and senior interim resourcing solutions across finance, treasury, strategy and corporate development | contact info@langdoncap.com | visit www.langdoncap.com
About Bridging Funding
Bridging Funding is a private credit fund engaged in principal lending of commercial property bridging loans in the UK and select South-East Asian markets. We lend between £200k and £20m per transaction. As a private credit fund, our credit sanctioning process is leaner and more flexible than lenders funded by bank capital | contact sr@bridgingfunding.com | mention code “Langdon” for preferential rates | visit www.bridgingfunding.com
This is not financial advice or any offer, invitation or inducement to sell or provide financial products or services or to engage in any form of investment activity.
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