An agreement among lenders, often called an AAL, is a contract between the lenders funding a single loan that sets who gets paid first, who controls enforcement if the borrower defaults, and how decisions get made among the lender group. It typically sits behind a unitranche credit facility, dividing one loan into first-out and last-out tranches with sharply different economics. The borrower usually isn’t a party to it and often doesn’t know its terms.
How an AAL Differs From an Intercreditor Agreement
A traditional intercreditor agreement governs lenders who hold separate credit facilities with the same borrower. Each facility has its own loan documents, its own collateral package, and often its own administrative agent. The intercreditor agreement then addresses how those distinct facilities coexist, especially around lien priority and payment subordination. The borrower typically signs it and knows its terms.
An AAL works differently. It sits behind a single credit agreement. The borrower signs one loan, sees one interest rate, and deals with one administrative agent. The AAL then divides that single facility into tranches with different priority levels. Because the borrower usually is not a party and may not even know the split exists, the credit agreement generally cannot contain an override provision saying the AAL controls in a conflict. That would be unenforceable against a party who never agreed to unknown terms.
The practical effect: the borrower deals with the facility as a whole. The lender hierarchy lives in a document the borrower never sees.
The Payment Waterfall
The waterfall is the heart of any AAL. It dictates exactly how the borrower’s payments flow among lender groups. In a standard unitranche structure, creditors split into first-out and last-out tranches. First-out lenders receive all scheduled interest and principal before anything reaches the last-out group. If cash flow is sufficient to cover both, everyone gets paid on time. When it isn’t, first-out eats first.
The waterfall runs in two modes. During normal performance, payments flow pro rata or according to a negotiated split that may still direct some current interest to the last-out tranche. Once a triggering event occurs, the waterfall shifts to strict sequential priority. Triggering events typically include borrower insolvency, a payment default on first-out obligations, or the exercise of enforcement remedies. First-out lenders push to expand the list to include financial covenant breaches and failure to deliver financial statements. Last-out lenders push to limit it to the most severe defaults.
Sharing provisions back up the waterfall. If any lender receives a payment from the borrower that exceeds its pro-rata entitlement, the AAL requires that lender to turn the excess over to the group. This stops an individual creditor from jumping the line during distress, whether the extra payment came voluntarily or through a lawsuit recovery.
Voting Rights and Sacred Rights
Not every lender gets an equal say. Most routine decisions under a credit agreement require approval from the “Required Lenders,” a defined group typically holding more than 50% of outstanding loans and unused commitments. Weightier amendments and waivers usually require a supermajority, often 66⅔%.1U.S. Securities and Exchange Commission. Agreement Among Lenders These thresholds prevent a small minority from blocking necessary changes while still requiring broad consensus for anything significant.
Certain decisions sit outside majority rule entirely. The industry calls these “sacred rights,” and they require unanimous consent from every affected lender. Sacred rights generally cover any change that would directly reduce a lender’s economic return or structural protection:
- Reducing or forgiving principal, interest, or fees, or extending the scheduled due dates for any payment.
- Pushing back the final maturity date or extending commitment periods.
- Releasing all or substantially all of the collateral, or releasing material guarantors.
- Changing the pro-rata sharing provisions or the priority waterfall.
- Amending the definition of “Required Lenders” or the consent thresholds themselves.
- Subordinating any lender’s lien or payment rights to new debt.
The unanimous consent rule exists because a simple majority could otherwise vote to slash interest rates or extend maturity in ways that would devastate a minority. Lenders who don’t negotiate robust sacred rights at the outset can be outvoted on changes that fundamentally rewrite their deal.
The AAL also specifies how lenders deliver enforcement instructions during a default. Lenders submit written directives to the administrative agent specifying the action they want taken, whether that’s accelerating the debt, sweeping cash, or foreclosing on collateral. Those instructions only bind the agent if they meet the contractually required voting threshold.
Standstill Periods and Who Controls Enforcement
When a borrower defaults, not every lender group can rush to foreclose. The AAL imposes standstill periods that temporarily block one tranche from exercising remedies, giving the other tranche time to act or attempt a workout.
In most unitranche structures, first-out lenders control initial enforcement. They typically face a short standstill of 5 to 30 business days before they can direct remedies, with even shorter windows for payment defaults or exigent circumstances. Last-out lenders face considerably longer standstills, commonly ranging from 45 to 150 days. During that window, last-out lenders cannot independently accelerate the debt, foreclose on collateral, or pursue legal action against the borrower.
The logic: first-out lenders hold priority and should get the first shot at recovering through enforcement or negotiating a restructuring. If they sit on their hands, the standstill eventually expires and last-out lenders gain the right to act. In some deals where last-out lenders carry more leverage, the positions flip, with the junior group getting a shorter standstill and earlier control.
Standstills are among the most heavily contested provisions in any AAL. A window that’s too long traps last-out lenders in a deteriorating situation with no ability to protect themselves. One that’s too short can force premature enforcement that destroys value for everyone.
Buy-Out Rights
Many AALs give last-out lenders, and sometimes first-out lenders, a right to purchase the other tranche’s position when certain events occur. The buy-out option is one of the most powerful tools in the agreement because it lets one group take control of the entire capital structure instead of fighting over remedies.
A buy-out right is typically triggered by acceleration of the debt or the commencement of a bankruptcy proceeding. The purchasing lender buys the other tranche’s loans at par, meaning the selling lender receives full principal plus accrued interest. The purchase is documented through an assignment and assumption agreement, and the buyer steps into all of the seller’s rights and obligations.1U.S. Securities and Exchange Commission. Agreement Among Lenders
For last-out lenders, the buy-out right is especially valuable in bankruptcy. Rather than watching first-out lenders control the restructuring and potentially accept a deal that shortchanges the junior position, the last-out group can buy out the senior debt, unify the capital structure, and drive the outcome. The trade-off: the buyer absorbs the full credit risk of a distressed borrower in exchange for complete control.
Priority in Bankruptcy
The hierarchy in an AAL does not evaporate when the borrower files for bankruptcy. Federal law expressly provides that a subordination agreement is enforceable in bankruptcy to the same extent it would be enforceable outside of it.2Office of the Law Revision Counsel. 11 USC 510 – Subordination The contractual priority between first-out and last-out lenders carries into a Chapter 11 proceeding, and a bankruptcy court will respect the waterfall when distributing collateral proceeds or plan recoveries between the groups.
When collateral is liquidated, proceeds follow a statutory order. Disposition costs and reasonable legal expenses come off the top. The remaining proceeds satisfy the obligations secured by the primary security interest, and only then do subordinate lienholders collect, provided they submitted a written demand before the distribution was completed.3Legal Information Institute. UCC 9-615 – Application of Proceeds of Disposition In practice, AAL waterfall provisions typically require the first-out tranche to recover post-petition interest and enforcement expenses before any interest or principal flows to last-out lenders. That post-petition interest right is one of the most valuable protections senior lenders negotiate, because unsecured creditors rarely collect post-petition interest under the Bankruptcy Code’s priority scheme.4Office of the Law Revision Counsel. 11 USC 507 – Priorities
The Administrative Agent’s Role
The administrative agent is the operational hub of a multi-lender facility, but its role is narrower than many participants assume. The agent processes payments through the waterfall, distributes notices, maintains the official lender register, and acts on instructions from the Required Lenders. That’s largely where the job ends. Agents are not fiduciaries. They have no implied duties beyond what the loan documents expressly assign them, no obligation to monitor the borrower’s financial health, and no duty to disclose information unless the agreement says otherwise.
The register records each lender’s name, address, commitment amount, and outstanding loan balance. Entries are treated as conclusive evidence of lender status absent clear error, and the register must be available for inspection by the borrower and any lender on reasonable notice.5U.S. Securities and Exchange Commission. Successor Agent Agreement and Amendment to Credit Agreement If a dispute arises over who holds what share, the register is the definitive record.
The agent’s liability is typically limited to gross negligence or willful misconduct. Lenders indemnify the agent on a pro-rata basis for losses the borrower’s own indemnity doesn’t cover.
Transfers and Assignments
Lenders rarely hold their positions for the full life of a loan, and the AAL governs how interests can be transferred. Any lender assigning its position under the credit agreement must ensure the assignee formally acknowledges and agrees to be bound by the AAL. This is handled through an additional holder acknowledgment delivered to the administrative agent, which specifies whether the new lender is joining the first-out or last-out tranche. An assignment that fails to satisfy these conditions is void.1U.S. Securities and Exchange Commission. Agreement Among Lenders The requirement protects existing lenders by ensuring every participant is bound by the same internal rules.
Most credit agreements also require the borrower’s consent to assignments, unless a default has occurred. Minimum assignment amounts, typically $1 million or $5 million, prevent the lender group from fragmenting into dozens of small holders who would complicate voting and administration. Lenders may delegate rights to affiliates or related funds without going through the full assignment process.