Suppose a small business goes to a bank to apply for a line of credit. The company already has a mortgage through another bank on its office building. If the bank approves the line of credit, it will sign a subordination agreement. The agreement establishes the lender`s receivables on the bank`s guarantees that grants the line of credit in case the company defaults on a loan. Suppose a business has a line of credit when it already has a long-term loan from a bank. This line of credit includes an agreement or subordination clause as part of the loan supporting documents. In the event of a default, the long-term lender is initially entitled to assets; The Equity Line lender has a second right. A subordination and status quo agreement defines specific or general guarantees, the rights of the younger lender and the priority of those rights. The agreement contains a detailed definition and description of the conditions of subordination and what happens in the event of default or bankruptcy. In a subordination and status quo agreement, the junior lender agrees to inform the senior in the event of a default of the company`s junior loan. A recent example of two companies that have signed such an agreement is Glencore plc, a Commodities trader based in Switzerland, and Bunge Ltd, an American agricultural commodities trader.
In May 2017, Glencore took an informal step to buy Bunge. Shortly thereafter, the parties agreed to a status quo agreement that prevents Glencore from accumulating shares or making a formal offer for Bunge until a later date. In the development of real estate, it is sometimes necessary for a borrower to receive money from more than one lender. In this case, it is likely that a priority structure will be created among the lenders participating in the transaction. Often, at the lender`s insistence, a « priority agreement » or « subordination agreement » is required of any « subordinate lender » that ranks behind the former lender as a priority (the « previous lender »). Whether or not the previous lender makes any compromise on the true status quo agreement depends, among other things, on the nature of the subordinated loan.