The what, why and how of priority arrangements

DATE PUBLISHED: March 14, 2025

key takeaways

Not all priority arrangements are the same – what are the existing securities and what are you trying to secure?
The value of a priority arrangement is dependent on the equity in the assets offered as security.
Do your due diligence and verify the collateral’s value before lending funds.

Understanding Priority Arrangements and their importance

Lenders take security under lending arrangements to mitigate the risks associated with lending. That is, where a borrower fails to repay the loan (or breaches the loan terms), the lender may enforce its security to recoup their loan (and any other amounts payable to it).

Before lending, lenders need to consider the “value” of the security being offered – which includes assessing their priority ranking in relation to other creditors. Security without priority or value is worthless. A lender must satisfy itself of two things before lending:

1
where does their security rank in the order of priority (priority)?; and
2
whether there is sufficient equity in the secured assets, especially if they hold a lower-ranking position (Equity in the secured assets)?.

This article considers the issue of priority – what it means, why is it important and what lenders can do to protect or enhance their position.

What is a priority arrangement and when is it required?

A documented priority arrangement is required when multiple lenders/creditors hold security and the parties which to secure their position to be repaid the money owing to them.

What is a priority arrangement and when is it required?

Priority arrangements commonly take three forms. The structure of the arrangements between the parties will determine the structure of the arrangement which is best.

What is a Priority Deed?	What is a Subordination Deed?	What is a Intercreditor Deed?
sets the order of priority for securities amongst two or more creditors who hold security over the same assets only applies to secured debts over the same assets ranks creditors in order of their rights to negotiate the debts owned and payment of those amounts addresses what steps each lender may take to enforce its security does not regulate payments to creditors prior to a default or enforcement of security, but rather, govern the enforcement process between the creditors it may benefit lower-ranking lenders by capping the amount for which the senior lender has priority	sets out the payment arrangements between two or more creditors, in respect of each creditor’s debt – one party stands behind another party may apply to both unsecured debt and secured debt even where the security is not the same addresses what steps each lender may take to recover debts and regulates the payments of those debts	Combination of the Priority Deed and Subordination Deed – it regulates the order of securities and the payment of debts

Why should parties enter into priority arrangements?

A priority arrangement protects lenders (and prevents disputes) where there are multiple lenders, particularly, if the borrower defaults or becomes insolvent in the future.

Without a well drafted priority arrangement, lenders may face uncertainty about repayment order.

How to determine the equity in secured assets before lending?

For a lender, ensuring priority over other creditors is just as crucial as verifying that the value of the collateral securing a loan is sufficient.

Assessing the value and nature of collateral is essential, if an asset holds little to no value or if the security does not secure the right assets, then, the likelihood of recovering the loan is minimal.

To assess the equity in secured assets, a lender should:

1
Review financial position – Examining the borrower’s financial position including reviewing financial statements may provide an insight into the assets owned by the borrower, any exiting liabilities tied to them.
2
Obtain Professional Valuations – Engaging an independent valuer to appraise assets such as property, machinery, or vehicles to understand the condition and market value.
3
Conduct Title and PPSR Searches – Conduct title searches of properties owned by the borrower and PPSR searches over the borrower to understand the determine current encumbrances or competing security interests to ensure the lender’s priority will be protected.
4
Property Searches - Conduct property searches to see if the borrower owns any other properties that could be secured.
5
Conduct court searches – Conduct court searches to determine if there are any proceedings against the borrower to determine if they are insolvent or may become insolvent in the future.
6
Assess Market Conditions – The value of certain assets, such as inventory or commercial property, may fluctuate based on industry trends, affecting their realisable value.
7
Determine Loan-to-Value Ratio – Comparing the loan amount to the asset’s appraised value helps gauge the adequacy of collateral and potential recovery in case of default.

Lenders may mitigate its risks by performing thorough due diligence on the assets being offered as security

how can mcinnes wilson help?

McInnes Wilsons’ finance team is known for their commercial approach across all areas of private debt including the preparation and negotiation lending, security and priority documents and advising a range of participants in financing transactions, including senior and mezzanine debt financiers, capital market arrangers, borrowers, sponsors and other equity participants.