The IPA and the Priority of Payment

The Inter-Party Agreement is the mechanism for Navigating Senior, Mezzanine, and Junior Debt by setting out the precise Recoupment Waterfall—the sequence of repayment from the film’s gross revenues.

The IPA defines the concept of Subordination, which is the legal agreement by a lower-ranking lender to be paid only after a higher-ranking lender is fully satisfied.

For a commercial bank providing the cheapest, most stable Senior Debt, the IPA is the primary defense of their investment. It is the document that legally guarantees:

1. First Lien: The Senior Lender has the first legal claim on the collateral (e.g., pre-sale MGs, tax credits).
2. Repayment Certainty: No other party can receive revenue from the film until the Senior Lender is paid in full (principal, interest, and fees).

This clarity in the IPA is what allows the bank to transform the soft collateral of distribution contracts into hard, fundable debt, a process detailed in The Art of the Pre-Sale: Collateralizing Distribution Deals for Debt Financing.

Three Classes of Debt: The Subordination Structure

The complexity of Navigating Senior, Mezzanine, and Junior Debt lies in balancing the interests of different lenders who take on varying levels of risk, which is the core subject of Bank Financing vs. Mezzanine Lending: Which Debt Structure is Right for Your Film. The IPA formalizes their hierarchy:

1. Senior Debt (First Position)

• Security: Secured by hard collateral (MGs, government tax credits) and the Completion Bond.
• IPA Role: The IPA confirms the Senior Lender’s absolute priority, placing them at the top of the Capital Stack as the first to be repaid.

2. Mezzanine Debt (Second Position)

• Security: Secured by secondary collateral, such as unsold territories or the projected Ultimate Gross (revenue beyond the secured MGs).
• IPA Role: The Mezzanine Lender agrees to subordinate their position to the Senior Lender. The IPA states that the Mezzanine lender receives zero principal or interest payments until the Senior Lender is completely whole.

3. Junior Debt/Subordinated Loans (Third Position)

• Security: Often includes producer deferrals, government soft loans, or bridge loans on riskier tax incentives.
• IPA Role: These loans are placed below both Senior and Mezzanine Debt. Their repayment is only triggered once the two higher classes of debt are fully retired.

The precise legal structure of this debt hierarchy, as laid out in the IPA, is what determines the final risk profile for the subsequent Equity Tranches.

The IPA vs. the CAM Agreement: Controlling the Cash

While the IPA defines who gets paid in what order, the Collection Account Management (CAM) Agreement defines how the cash is handled. These two documents work in tandem to secure the lenders.

• Inter-Party Agreement (IPA): The Constitutional Document. It sets the law—the contractual rules of priority and subordination for all debt.
• CAM Agreement: The Operational Document. It creates the mechanism—the third-party bank account and legal instruction that ensures the funds flow directly from distributors to the Collection Account and are then distributed according to the IPA’s waterfall.

The IPA is legally attached to the CAM Agreement. Without the IPA, the Collection Manager has no legal basis for knowing which lender to pay first.

Together, they create a legally ring-fenced structure that guarantees the priority of debt repayment over all producer or equity claims.

What the IPA Enforces Beyond Repayment

The scope of the IPA extends beyond simple repayment order. For Navigating Senior, Mezzanine, and Junior Debt efficiently, the IPA also enforces crucial covenants that protect the lenders during the production phase:

1. Covenants and Defaults: It dictates which party is notified, and in what order, if the producer defaults on a key contractual obligation (e.g., failure to deliver a promised cast member).
2. Amendments and Waivers: It specifies which parties have the right to approve changes to the budget, key personnel, or the distribution contracts. The Senior Lender typically retains the final say on any major financial or creative amendment that could jeopardize their collateral.
3. Cross-Collateralization Rules: It provides protection to the producer’s specific project by explicitly forbidding a lender from using a loss on this project to offset profits on another—unless the deal is a formal Single-Purpose vs. Slate Equity Deals.

The IPA thus manages the legal risks associated with all the capital layers, ensuring that the Capital Stack itself remains stable and enforceable.

Conclusion: The Strategic Imperative

The Inter-Party Agreement is the executive document that brings financial order to a multi-lender film production.

By explicitly defining Subordination and formalizing the Recoupment Waterfall, it secures the priority of the Senior Lender, manages the risk of the Mezzanine Lender, and clarifies the ultimate payout structure for equity.

Mastery of the IPA is the final, essential step in moving a project from a creatively-driven budget to a legally and financially sound production enterprise.