Managing Creditor Risk through Inter-Creditor Agreements


James is the CEO of  HOC Global Logistics, a company which provides shipping solutions to large organisations. Having become tired of leasing cargo ships from large vessel owners, the company desires to purchase its own ships which they can use and also lease to 3rd parties. James approaches Lakeside Bank for a Term Loan to finance the $50 million transaction.

The Bank after reviewing the loan proposal filed by HOC Logistics, informed James that the transaction was larger than Lakeside bank could comfortable handle. However they are able to loan him $20 million on the security of the purchased ship. James accepts the terms and applies for loans from Cityscape Capital Ltd , HSCB, Shanghai Bank  and Union Finance Ltd. The individual loans have different terms, interest rates and security interests. The complexity of the transaction is so mind boggling that James sets up an appointment with his Lawyers to advise him on how to manage the relationships between the multiple creditors in such a manner as to enable the company satisfy all its loan liabilities. He is advised to structure and negotiate an intercreditor agreement among the several creditors, thereby ensuring he has a more convenient financing process.

An intercreditoragreement seeks to govern the relationship between a range of creditors providing finance to the same borrower. An intercreditor agreement entered into by senior and junior creditors can be expected to rank the senior and junior security, subordinate the debt of the junior creditors to that of the senior creditors, restrict the junior creditors’ rights of enforcement for a specified standstill period and impose payment freezes on the junior debt in prescribed default situations.

In highly leveraged transactions such as leveraged buyouts and certain acquisition finance transactions, funding may be structured into a number of different tranches of lenders who stipulate slightly different lending terms and interest rates for the funds they advance. Senior lenders and mezzanine lenders usually take security over the assets of the borrower, over shares acquired and over the target group’s assets. In addition, guarantees will be given by the borrower and may also be given by the target group.

The senior creditors tend to have a stronger negotiating position than do the junior creditors, so it is usual practice for the senior bank lenders and mezzanine lenders to appoint a single security agent (or security trustee) to hold the security package on trust for the benefit of all the secured creditors. The intercreditor agreement contains provisions dealing with enforcement of the security, usually requiring the junior creditors (the mezzanine lenders) to desist from enforcement for the standstill period so as to leave the way clear for the senior creditors (the senior lenders and any hedge counterparties) to instruct the security agent as to when and how to enforce their right to the secured assets.




The paramount objective of investment is profit, and the imperative for return on investment is no more relevant than when you have invested in a company and the company has declared a profit. The management of the company is however faced with the vexing question of determining whether to apply the profits towards issuing dividends to shareholders or to embark upon a stock buyback programme. Companies which retain substantial amounts of cash on their balance sheet make attractive targets for takeover, especially as they imply that the management of the company are incapable of effectively applying the retained earnings towards the generation of further profits for the company.


When a company repurchases its shares, it reduces the number of shares held by the public, thereby increasing the company’s subsequent earnings per share. This in turn increases the value of the outstanding shares. This option best obtains where the shares of the company are undervalued and shareholders are relatively unsophisticated. The repurchased shares may later be resold to new investors at a substantial profit to the company.


The repurchase programme has the added advantage of making the outstanding shares more expensive, reducing the attractiveness of the company as a takeover target. Moreover, buybacks reduce the assets on the balance sheet, thus increasing the company’s return on assets and return on equity without any substantial increase in the performance of the company. This cosmetic effect often impresses positively on the investment community, especially investment analysts and retail investors.


A further benefit of stock buybacks is the reduction of shareholder tax liability, making it a tax efficient form of earnings distribution. When a company makes a profit, it is statutorily obligated to pay Companies Income Tax on its profits before dividends are issued. Upon the issuance of dividends, the shareholder pays the government a withholding tax, meaning that the profits have been subjected to double taxation. Stock buybacks thus rewards the shareholder financially, without the tax liabilities inherent in dividend issuance.


Typically, buybacks are carried out in one of two ways:


  1. Tender Offer:


the company may present the company with an offer to submit, or tender, a portion or all of their shares within a certain time frame. The tender offer will stipulate both the company is looking to repurchase and price they are willing to pay, which is almost always at a premium to the market price of the shares. Shareholders who accept the offer will state the number of shares they intend to tender and the price which they are willing to accept. Once the company has received all the offers, it will find the right mix to buy the right mix to buy the shares at the lowest cost.


A variant of the tender offer is the fixed price tender offer. Whereby the company stipulates a price at which it is willing to repurchase the shares and gives the shareholders the option to accept the offer as stated. This is the method currently utilized by Unilever Plc in its recently concluded tender offer.


  1. Open Market Buyback:


This involves the purchase of the shares by the company on the open market in a manner similar to open market transactions commonly undertaken by any other party. It is important to note, however that the Investment and Securities Act (2012) requires companies to announce the commencement of a stock buyback scheme and the announcement of a buyback commonly results in a rise in the share price of the company.

There is no definite answer to the question as to whether stock buybacks are a beneficial option, as this depends upon the circumstances surrounding the tender offer.


Milton and Cross offers investment advisory and due diligence services to individual and corporate shareholders who require legal advice on the issuance or acceptance of tender offers and the elements of share repurchase transactions generally. We may be contacted directly on +2348036258312, or by email on :