ABL Intercreditor Agreements: Split Collateral, Standstill, and Payment Blockage

Why the ICA Matters

Most middle-market borrowers with split capital structures have an ABL revolver and either a term loan, mezzanine notes, or unitranche debt sitting alongside it. Each piece of that structure is documented in its own credit agreement, but the relationship between them lives in a separate document: the intercreditor agreement, or ICA. The ICA sits between the credit facilities and the bankruptcy code. It defines who has priority on which collateral, who can collect payments and when, who can exercise remedies and after what waiting period, and who controls cash collateral and DIP financing once the borrower files Chapter 11.

Borrowers tend to view the ICA as something the lenders work out among themselves. That view is wrong. Provisions in the ICA flow directly back into the credit agreements -- amendment rights, mandatory prepayments, permitted debt baskets, collateral access, even basic things like which lender gets to dictate inventory liquidation strategy. Sponsors and borrowers who do not engage on the ICA end up living with terms that constrain the operating business in ways nobody anticipated at signing.

At Don Clarke Enterprises we have placed and restructured ABL facilities for four decades. Donald Clarke founded Asset Based Lending Consultants in 1986, was inducted into the SFNet Hall of Fame in 2021, and authored Asset Based Lending Disciplines -- the first textbook on the discipline. He has trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays on the structures described below. We do not consult. We execute.

The Split-Collateral Architecture

The dominant ABL intercreditor structure is split-collateral, also called crossover or split-lien. Both lenders have liens on essentially all of the borrower's assets, but the priorities are different. The ABL lender holds a first lien on ABL priority collateral -- working capital assets, principally accounts receivable, inventory, related deposit accounts, and the proceeds and supporting obligations associated with them. The term lender holds a first lien on term priority collateral -- everything else, principally fixed assets (PP&E, real estate, intellectual property, equity interests, and the proceeds of those assets). Each lender then takes a junior lien on the other side's priority collateral.

The reason for this architecture is that the two lender groups are pricing different things. The ABL lender is underwriting liquidation value of working capital, where collateral turns over quickly and the borrowing base resets daily. The term lender is underwriting cash flow and the long-term value of fixed assets, where the collateral is durable but illiquid. Putting each lender first on the collateral they actually understand produces the most efficient pricing for the borrower.

The lines between ABL priority collateral and term priority collateral are not quite as clean as they look. Boundary issues come up constantly:

• Mixed proceeds. When fixed assets are sold, the cash proceeds eventually land in a deposit account. Is the cash term priority collateral (because it came from term collateral) or ABL priority collateral (because all deposit accounts default to ABL)? The ICA needs to address this with allocation rules -- typically by tracing.
• Equity in subsidiaries. Equity is sometimes ABL priority and sometimes term priority depending on the deal. The default is usually term priority.
• Intellectual property. Brand and trademark rights are often the most valuable asset in a consumer business. They typically sit with the term lender, but the ABL lender wants license rights to use them in a liquidation -- because nobody buys inventory branded with someone else's mark.
• Receivables from disposition of fixed assets. A receivable created by selling a fixed asset is, by default, ABL priority collateral. Term lenders push hard to carve these out as term priority.

The negotiation work is exactly the kind of detail that gets covered in our ABL term sheet guide -- but applied at the ICA layer, where the dollar consequences in default are largest.

The ABL Cap

One of the most heavily negotiated provisions in any split-collateral ICA is the cap on ABL priority obligations. The term lender wants a hard cap on how much the ABL lender can claim under its first lien on working capital collateral. The ABL lender wants no cap, or a generous one.

The market structure is a cap defined as the greater of (i) a fixed dollar amount, typically the maximum commitment plus a cushion of 10 to 25 percent for over-advances and protective advances, and (ii) the borrowing base. Most agreements include the borrowing base prong because the ABL lender's whole structural argument is that exposure is collateral-driven. But the cap itself is often expressed as a fixed dollar number for practical reasons -- borrowing base values change daily and are hard to test against in a workout.

The cap matters because it defines the boundary between first-lien and second-lien recovery. ABL exposure above the cap drops to second-lien priority on working capital collateral, behind the term lender's deficiency claim. Term lenders pay close attention to (a) the absolute dollar level of the cap, (b) whether protective advances and overadvances count toward the cap, (c) whether interest, fees, and PIK accruals count, and (d) whether the cap is permanent or grows over time as the ABL facility upsizes.

Standstill Periods and Payment Blockage

The ICA controls when each lender can exercise remedies against collateral and when each lender can receive payments. The two concepts are distinct but related.

Remedy Standstill

A remedy standstill is a contractual delay. After a default under one credit facility, the lender holding junior priority on a particular collateral pool agrees not to exercise remedies against that pool for a defined period -- giving the senior lender time to assess, negotiate, and act. In a split-collateral ABL/term loan structure, each lender is junior on the other side's priority collateral. So the term lender stands still on working capital collateral remedies for 90 to 180 days; the ABL lender stands still on fixed asset remedies for the same range. The lengths are negotiated and have shortened modestly in lender-friendly markets, but the 90 to 180 day band has been the durable range for most of the last decade.

During the standstill, the senior lender controls remedies -- ordering inventory liquidation, collecting receivables, foreclosing on equipment, conducting Article 9 sales. The junior lender's recourse is limited to monitoring and demanding adequate protection. Once the standstill expires, the junior lender can begin to exercise its own remedies, although in practice the senior lender's prior actions usually have determined recovery by then.

Payment Blockage

Payment blockage is different. It governs the borrower's ability to pay the junior creditor in the ordinary course. Most ABL/term loan ICAs do not include true payment blockage between the two facilities -- both are senior secured, and ordinary-course interest and amortization payments are generally permitted on both sides. Payment blockage shows up when a mezzanine or subordinated debt piece is layered on top.

For mezzanine debt, the ICA typically blocks payments on the subordinated debt during a senior payment default and during a senior covenant default for a defined window -- often 180 days for non-payment defaults, indefinite for payment defaults. The mezz lender retains the right to receive scheduled interest and amortization absent a senior default, but loses that right once a triggering default has occurred. Borrowers signing into a structure with mezz should know the blockage triggers cold; they directly determine the cash flow that mezz can capture in a stress scenario.

DIP Financing and Cash Collateral

The most consequential ICA provisions in retail bankruptcy and turnaround situations govern post-petition financing. When the borrower files Chapter 11, the ABL lender's prepetition position usually rolls up into a DIP ABL facility -- the same lender, similar terms, often a roll-up of prepetition obligations into post-petition liens and superpriority claims. This is the standard structure documented in our DIP ABL guide.

The ICA defines what consents are required. In a well-drafted split-collateral ICA, the ABL lender can consent (and the term lender cannot object) to use of cash collateral that is ABL priority collateral and to DIP financing that primes only ABL priority collateral, provided certain conditions are met. The reverse rule applies: the term lender can consent to use of cash collateral and priming DIP financing on term priority collateral without ABL objection. This symmetry is the core of split-collateral ICA bankruptcy mechanics.

Key negotiated points include: whether the ABL DIP cap can exceed the prepetition ABL cap, the conditions under which adequate protection can be sought by the junior lender, whether the term lender retains the right to credit-bid in a sale of term priority collateral, and which lender controls a 363 sale process. Each of these has direct dollar consequences in a workout and is worth negotiating before the borrower is ever distressed.

ABL Lender Access to Term Priority Collateral

One of the most practically important provisions in an ICA is the ABL lender's access right to fixed assets that are term priority collateral. The ABL lender's primary collateral is inventory, but inventory has to be stored somewhere -- a warehouse, a distribution center, a retail location. Those facilities are typically owned by the borrower and constitute term priority real estate. In a liquidation, the ABL lender needs physical access to that real estate to conduct an orderly inventory sale.

The ICA grants the ABL lender a defined access period -- typically 90 to 180 days -- during which the ABL lender can use the real estate and other fixed-asset collateral (including IP and trademarks) to conduct its liquidation. The borrower or term lender may seek rent or use payments during that period. The access period is critical to actual recovery on inventory; an ABL lender who loses physical access to inventory before the sale completes recovers materially less than one who keeps access through the full sale cycle.

The same logic applies in reverse for term lenders, although less commonly invoked. The term lender's access to working capital collateral primarily matters when the term lender forecloses on a going-concern business and needs to keep operations running -- which is rare but does happen.

Debt Document Amendments

Each lender has an interest in restricting the other lender's ability to amend its credit agreement in ways that change the ICA's economic outcome. The term lender particularly cares about amendments that increase the ABL borrowing base -- adding new categories of eligible collateral, raising advance rates, or relaxing dilution reserves all increase the size of the ABL claim that has priority on working capital collateral. The ICA typically includes anti-amendment provisions that lock down the borrowing base formula at signing.

The ABL lender pushes back. The borrowing base is supposed to be dynamic -- new business, new collateral categories, lender-favorable performance can all expand availability over time. Locking down the formula at closing forces the borrower to renegotiate the ICA every time business needs change. The compromise is usually that the ABL borrowing base can be amended freely, but the ABL cap (the dollar limit on first-lien priority claims) cannot be increased without term lender consent.

What to Negotiate

For sponsors and borrowers signing into a split-collateral ABL/term loan structure, the high-leverage ICA negotiation points are:

1. Clear allocation of mixed-proceeds collateral. Tracing rules, deposit account treatment, and disposition proceeds.
2. ABL access rights to fixed assets. Length of the access period, scope (real estate, IP, books and records), rent/use payment mechanics.
3. ABL cap. Absolute level, treatment of overadvances, treatment of interest and fees, growth provisions.
4. Borrowing base amendment freedom. Push to keep amendments freely permitted within the cap.
5. Standstill periods. The junior side wants shorter standstills; senior side wants longer; the 90-180 band is typical and 120 days is a common landing spot.
6. DIP and cash collateral consent rules. Each lender's ability to consent to use of its priority collateral without the other's objection.
7. Adequate protection. When and what each lender is entitled to in a Chapter 11 case.
8. IP license to ABL on liquidation. Critical for branded inventory; the term lender often pushes back hard.

Each of these has real dollar consequences. The work to negotiate them is concentrated, the lawyers are expensive, and the consequences are durable. This is exactly the kind of structure work where engaging an advisor with deep ABL pattern recognition pays for itself many times over.

Why DCE

We sit at the table on split-collateral ABL/term loan structures regularly. We know how the major ABL desks negotiate the ABL cap, where they will give on standstill, what their floor is on access rights, and how each major term lender shop approaches the same provisions from the other side. We know which intercreditor templates each lender starts with, which clauses are real lines and which are opening positions, and which compromises hold up in workout.

If you are signing into a split-collateral structure, refinancing one, or trying to figure out whether your existing ICA constrains operating flexibility in ways you have not seen, we can help. Our work covers term sheet review, ICA negotiation, lender selection, and post-closing covenant management. The deeper guides on the ABL term sheet, on choosing the right ABL lender, and on DIP ABL financing all touch the same body of work.

We do not consult. We execute.