This article considers how intercreditor arrangements can be structured for Iraqi projects funded from several sources. Large projects in Iraq, whether in energy, infrastructure, real estate or industry, rarely rely on a single lender. Funding may come from Iraqi banks, foreign commercial banks, development finance institutions, export credit agencies, equipment suppliers and the sponsors themselves. Each funder has its own priorities, risk appetite and documentation, and their rights may conflict when the project faces difficulty.
An intercreditor agreement sets out how these funders relate to each other: the ranking of their claims, how security is held and shared, how payments are applied and who decides when and how to enforce. Without one, funders may compete for the same assets, take inconsistent enforcement steps and undermine the project’s ability to recover. Iraqi law does not provide a detailed statutory framework for these arrangements, so they depend largely on contract.
The Iraqi Civil Code No. 40 of 1951 governs contractual arrangements, mortgages, pledges, the ranking of claims and subordination agreements where Iraqi law applies. The Real Estate Registration Law No. 43 of 1971 governs registration of mortgages over project land. The Execution Law No. 45 of 1980 governs enforcement. The Banking Law No. 94 of 2004 and Central Bank of Iraq instructions govern Iraqi bank participation. The Investment Law No. 13 of 2006, as amended, may affect security over investment project assets. Foreign lenders’ documents are often governed by foreign law, raising questions of recognition in Iraq.
Identifying the creditor classes
The first step is to identify each funding source and its intended position:
- Senior lenders. Banks and institutions providing the main debt, typically expecting first-ranking security and priority in payment.
- Mezzanine or subordinated lenders. Funders accepting lower priority in exchange for higher returns.
- Hedging counterparties. Banks providing interest rate or currency hedging, often ranking alongside senior lenders.
- Suppliers and contractors. Parties providing deferred payment or vendor financing.
- Shareholders. Sponsors providing shareholder loans, usually subordinated to all external debt.
Each class’s position should be agreed commercially before the intercreditor terms are drafted.
Ranking claims and payments
The intercreditor agreement should set out the order in which project revenues are applied, often called the payment waterfall. A typical waterfall applies revenues first to operating costs and taxes, then to senior debt service, then to reserve accounts, then to subordinated debt and finally to distributions to shareholders. The agreement should specify what happens when there is insufficient cash, whether subordinated creditors may receive payments while senior debt is in default and how payments received in breach of the waterfall are to be turned over.
Contractual subordination is generally effective between the parties to the agreement. Whether it binds a liquidator or other creditors in an insolvency depends on the applicable rules, and the parties should consider this risk. Commercial contract advice in Iraq can help draft subordination provisions consistent with Iraqi law.
Holding and sharing security
Security over project assets in Iraq, such as mortgages over land and pledges over equipment and shares, must be created and registered in accordance with Iraqi law. Where several lenders share security, the parties should consider:
- Security agent. Whether a single agent can hold security for all lenders. Iraqi law does not have a developed concept of trust, so the ability of an agent to hold a mortgage on behalf of others should be assessed carefully. Alternatives include registering security in the names of each lender or using parallel debt structures.
- Ranking of security. Whether lenders share security equally or hold first and second ranking security. Registration order may determine priority under Iraqi law, so the documents and registrations should be aligned.
- Release and substitution. How security will be released on repayment or substituted when assets are replaced.
Real estate advice in Iraq can assist with registration of mortgages and the structure for multiple lenders.
Controlling enforcement
Enforcement decisions are central to the intercreditor agreement. Senior lenders will want to control enforcement. Subordinated lenders will want protection against enforcement that destroys value. The agreement should address:
- Who can declare a default and accelerate.
- Standstill periods. How long junior creditors must wait before enforcing after a default.
- Voting thresholds. The majority of lenders needed to instruct enforcement.
- Enforcement method. Whether to sell the project, its shares or individual assets, and how the sale process will be conducted.
Enforcement in Iraq will typically proceed through the execution directorate or the courts, and the parties should consider how foreign-law-governed enforcement provisions will operate within that process.
Addressing government and offtaker relationships
Many projects depend on contracts with government bodies or state-owned companies, such as offtake agreements, concession agreements or land allocations. These contracts may restrict assignment, change of control or step-in by lenders. Lenders may seek direct agreements with the government counterparty, giving them notice of defaults and the right to cure or substitute a new operator. Whether such agreements are available depends on the counterparty and applicable rules.
Coordinating shareholder support
Sponsors may provide completion guarantees, cost overrun facilities or equity commitments. The intercreditor agreement should coordinate these with the lenders’ rights, including whether shareholder loans are subordinated, whether sponsors can be repaid during construction and how sponsor support is enforced. Corporate advice in Iraq can help align shareholder arrangements with lender requirements.
Managing currency and accounts
Funding in different currencies, and revenues in Iraqi dinars, create currency risk. The agreement should set out how revenues will be converted, which accounts will hold reserves and who controls them. Accounts held in Iraq may be subject to Central Bank requirements and attachment by other creditors, so account control arrangements should be structured carefully.
Planning for refinancing and new money
Projects often need additional funding during their life, for cost overruns, expansion or refinancing of construction debt with longer-term financing. The intercreditor agreement should anticipate this by setting out whether additional debt can rank alongside or ahead of existing debt, which creditors must consent and how new lenders accede to the agreement.
Without such provisions, a single creditor may be able to block new money that the project needs, using its veto to extract concessions. Conversely, provisions that allow new senior debt too easily may dilute existing lenders’ security. A balanced approach permits new money for defined purposes, such as completion of construction, up to defined limits and subject to majority lender consent.
Refinancing provisions should address the release and retaking of security, since in Iraq release and new registration of mortgages may create a period in which the project is not fully secured. Simultaneous release and registration, or retention of existing security with a transfer to new lenders, may be options depending on the registry’s practice.
Illustrative example. A power project in Iraq is funded by an Iraqi bank, a foreign development lender and a shareholder loan. The Iraqi bank holds a registered mortgage over the land, while the development lender holds a pledge over shares in the project company governed by foreign law. When the project falls behind schedule, the Iraqi bank seeks to enforce its mortgage, while the development lender wants to restructure. Without an intercreditor agreement, the lenders’ interests conflict. A properly structured agreement would have provided for shared security, a standstill period and majority voting on enforcement, allowing a coordinated response.
Conclusion & how Etihad Law Firm can help
Intercreditor arrangements are essential for Iraqi projects with multiple funding sources. Clear ranking, workable security sharing, coordinated enforcement and alignment with government and shareholder arrangements protect all funders and give the project the best chance of success.
Etihad Law Firm advises lenders, sponsors and project companies on intercreditor arrangements, security structures and project finance in Iraq. We help clients design arrangements that work within Iraqi law and align with international financing documents.