A subordination and standstill agreement (SSA) is a legal contract that outlines the relationship between a borrower, lender, and a third-party creditor. This agreement is often used in complex financial transactions like acquisitions, mergers, or debt refinancing.
The purpose of an SSA is to define the order in which various creditors will be paid in the event of a default by the borrower. The agreement sets out the terms and conditions under which the third-party creditor agrees to subordinate its claim on the borrower`s assets to the lender`s claim.
In simple terms, this means that the third-party creditor agrees not to pursue its claim on the borrower`s assets until the lender has been fully paid. This ensures that the lender`s claim takes priority over any other claims, allowing them to recover their money as quickly and efficiently as possible.
The standstill provision of an SSA refers to the time period during which the third-party creditor is prohibited from taking any action against the borrower. This may include things like enforcing its security interest, suing for payment, or accelerating the debt. During the standstill period, the borrower has the opportunity to negotiate with the third-party creditor and hopefully avoid default.
The subordination and standstill agreement is commonly used in complex financial transactions because it protects the interests of both lenders and borrowers. For example, if a company is refinancing its debt and needs a new loan, the lender may require an SSA to ensure that its loan takes priority over any other creditors.
Similarly, if a company is being acquired by another company, the acquiring company may require an SSA to protect its investment and ensure that its loan is repaid before any other creditors.
In conclusion, a subordination and standstill agreement is a legal contract that outlines the relationship between a borrower, lender, and a third-party creditor. It establishes the priority of claims and provides a framework for negotiations in the event of default. This agreement is an important tool for businesses involved in complex financial transactions and can help protect their interests and ensure a positive outcome for all parties involved.