The buyer's senior lender insists on a standard intercreditor agreement that includes an indefinite payment standstill on our subordinated seller note if the buyer defaults on their bank debt. How do we negotiate terms like standstill expiration windows and cure rights so our seller debt is not frozen forever?

Question

Tyler Smith · Accepted Answer

When carrying a subordinated seller note behind senior bank financing, the bank will always demand an intercreditor agreement to protect its senior position. Standard lender forms include open-ended payment standstill provisions, which allow the bank to freeze all principal and interest payments on your seller note if the buyer triggers any covenant default, even a minor reporting technicality. You cannot leave your cash flow exposed to an indefinite bank freeze.

First, negotiate a strict time limit on payment blockages. Market standard for lower middle market transactions is a standstill window capped at 90 to 180 days within any 360-day period. Once that window lapses, scheduled debt service on your seller note must resume unless the senior lender has filed a formal judicial foreclosure action against the company.

Second, institute a payment-in-kind mechanism. If the senior bank halts cash payments, your promissory note must mandate that unpaid interest automatically capitalizes into the principal balance and accrues at a higher default interest rate. Third, negotiate notice and cure rights. Require the senior bank to notify you immediately of any buyer default, with the legal option for you to cure financial covenant shortfalls on the buyer's behalf to restart your payments. Finally, ensure the intercreditor agreement permits you to exercise board observer rights during any standstill period so you have full visibility into the company's financial turnaround.