INTERCREDITOR AND SUBORDINATION AGREEMENT

 

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                                                               Execution Version

 

                                                                    Exhibit 10.5

 

                    INTERCREDITOR AND SUBORDINATION AGREEMENT

 

     This Intercreditor and Subordination Agreement (this "Agreement"), dated as

of November 15, 2005, is among Citibank Texas, N.A. (formerly known as First

American Bank, SSB), as Administrative Agent (in such capacity, with its

successors and assigns, the "Senior Administrative Agent") for the Senior

Revolving Lenders, BNP Paribas, as Subordinated Administrative Agent, Parallel

Petroleum Corporation, a Delaware corporation and Parallel, L.P., a Texas

limited partnership (the "Borrowers") and Parallel, L.L.C., a Delaware limited

liability company (a "Subsidiary" and "Guarantor")

 

     WHEREAS, the Borrowers, the Senior Administrative Agent and other Senior

Revolving Lenders have entered into the Senior Revolving Credit Agreement,

pursuant to which such financial institutions have agreed, subject to the terms

and conditions thereof, to make loans and extend other financial accommodations

to the Borrowers; and

 

     WHEREAS, the Borrowers propose to enter into the Term Loan Agreement; and

 

     WHEREAS, it is a condition precedent to the obligations of the Term Lenders

under the Term Loan Agreement that the Borrowers execute and deliver this

Agreement.

 

     NOW THEREFORE, in consideration of the foregoing and the mutual covenants

herein contained and other good and valuable consideration, the existence and

sufficiency of which are expressly recognized by all of the parties hereto, the

parties agree as follows:

 

                                  ARTICLE XIII

                                 DEFINED TERMS.

 

     Section 13.01 Each capitalized term used in this Agreement, but not defined

herein, shall have the meaning ascribed such term in the Term Loan Agreement.

 

     Section 13.02 The following terms have the following meanings when used in

this Agreement:

 

     "Blockage Period" means a Non-Payment Blockage Period or a Payment Blockage

Period.

 

     "Eligible Swap Agreement" means any present or future Swap Agreement

between either of the Borrowers or any Subsidiary and any Senior Revolving

Lender or any Affiliate of any Senior Revolving Lender. For the avoidance of

doubt, a Swap Agreement ceases to be an Eligible Swap Agreement if the Person

that is the counterparty to such Borrower under a Swap Agreement ceases to be a

Senior Revolving Lender under the Senior Revolving Credit Agreement (or, in the

case of an Affiliate of a Senior Revolving Lender, the Person affiliated

therewith ceases to be a Senior Revolving Lender under the Senior Revolving

Credit Agreement).

 

 

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     "Enforcement Action" means, with respect to any Subordinated Obligations:

any enforcement of any right or remedy including any enforcement or foreclosure

of Liens granted by the Borrowers or any Subsidiary to secure any or all of such

Subordinated Obligations, any enforcement or foreclosure of Liens on any capital

stock or other equity interests in the Borrowers or any Subsidiary which may be

granted by the Borrowers or their Subsidiaries or any holder of equity in the

Borrowers to secure any or all of such Subordinated Obligations, or any other

efforts to collect proceeds from the Borrowers' or any of their Subsidiary's

assets or properties (including proceeds of production) to satisfy the

Subordinated Obligations, including, without limitation, the commencement, or

the joining with any other creditor of the Borrowers or any Subsidiary in the

commencement of any Insolvency Proceeding against the Borrowers or any

Subsidiary; provided, that none of the following shall constitute an Enforcement

Action: (a) acceleration of any of the Subordinated Obligations following

acceleration of any of the Senior Indebtedness (provided that such acceleration

of Senior Indebtedness has not previously been rescinded), (b) acceleration of

any of the Senior Indebtedness following acceleration of any of the Subordinated

Obligations (provided that such acceleration of the Subordinated Obligations has

not previously been rescinded), (c) actions by any Term Lender to obtain

possession of or receive Reorganization Securities, or (d) taking any action

described above during the existence of any Insolvency Proceeding subject to the

jurisdiction of a court of competent authority.

 

     "Insolvency Proceeding" shall mean (a) any voluntary or involuntary case,

action, or proceeding before any Governmental Authority having jurisdiction over

the applicable Person or its assets relating to bankruptcy, reorganization,

insolvency, liquidation, receivership, dissolution, winding-up, or relief of

debtors, or (b) any general assignment for the benefit of creditors,

composition, marshaling of assets for creditors, or other similar arrangement in

respect of its creditors generally or any substantial portion of its creditors;

in each case whether undertaken under U.S. Federal, state, or foreign law.

 

     "Non-Payment Blockage Period" means, with respect to any Non-Payment

Default, the period from and including the date of receipt by the Term Lenders

or the Subordinated Administrative Agent or other representative of a

Non-Payment Default Notice relating thereto until the first to occur of (a) the

date upon which the Senior Indebtedness have been paid in full in cash, all

commitments of any holder of Senior Indebtedness to make loans or extensions of

credit have terminated, and all letters of credit issued by any holder of Senior

Indebtedness or by any Affiliate of any such holder, have expired, terminated or

fully collateralized in cash, (b) the 179th day after receipt of such

Non-Payment Default Notice, (c) the date on which the Non-Payment Default which

is the subject of such Non-Payment Default Notice has been waived in writing by

the applicable holder or holders of the Senior Indebtedness or an agent or

representative on their behalf, cured, or ceased to exist, or (d) the date upon

which the Person(s) giving such Non-Payment Default Notice notify the Term

Lenders or the Subordinated Administrative Agent or other representative in

writing of the termination of such Non-Payment Blockage Period.

 

     "Non-Payment Default" means the occurrence of any event under any Senior

Revolving Document evidencing Senior Indebtedness, not constituting a Payment

Default, which gives the holder(s) of such Senior Indebtedness, or an agent or

representative acting on behalf of such holder(s), the right to cause the

maturity of such Senior Indebtedness to be accelerated

 

 

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immediately without any further notice (except such notice as may be required to

effect such acceleration) or the expiration of any applicable grace period.

 

     "Non-Payment Default Notice" means a written notice from or on behalf of

the Senior Indebtedness Representative that a Non-Payment Default has occurred

and is continuing which identifies such Non-Payment Default and specifically

designates such notice as a "Non-Payment Default Notice".

 

     "Payment Blockage Period" means, with respect to any Payment Default or

Senior Indebtedness Acceleration, the period from and including the date of

receipt by the Term Lenders or the Subordinated Administrative Agent or other

representative of a Payment Default Notice relating thereto until the first to

occur of (a) the date upon which the Senior Indebtedness have been paid in full

in cash, all commitments of any holder of Senior Indebtedness to make loans or

extensions of credit have terminated, and all letters of credit issued by any

holder of Senior Indebtedness or by any Affiliate of any such holder, have

expired, terminated or fully collateralized in cash, (b) if such Payment Default

Notice relates to a Payment Default, the date on which the Payment Default which

is the subject of such Payment Default Notice has been waived in writing by the

applicable holder or holders of the Senior Indebtedness or an agent or

representative on their behalf, cured or ceased to exist, or if such Payment

Default Notice relates to a Senior Indebtedness Acceleration, the date on which

such acceleration is rescinded, annulled or ceased to exist, or (c) the day upon

which the Person(s) giving such Payment Default Notice notify the Term Lenders

or the Subordinated Administrative Agent or other representative in writing of

the termination of such Payment Blockage Period.

 

     "Payment Default" means a default by either of the Borrowers or any

Guarantor in the payment of any amount owing with respect to the Senior

Indebtedness, whether with respect to principal, interest, premium, letter of

credit reimbursement obligations, commitment fees or letter of credit fees or

otherwise when the same becomes due and payable, whether at maturity or at a

date fixed for payment of an installment or prepayment or by declaration or

acceleration or otherwise.

 

     "Payment Default Notice" means a written notice from or on behalf of the

Senior Indebtedness Representative that either (i) a Payment Default with

respect to such Senior Indebtedness has occurred and is continuing, or (ii) a

Senior Indebtedness Acceleration with respect to such Senior Indebtedness has

occurred and is continuing.

 

     "Reorganization Securities" means (a) debt securities that are issued

pursuant to an Insolvency Proceeding the payment of which is subordinate and

junior at least to the extent provided in this Agreement to the payment of the

Senior Indebtedness outstanding at the time of the issuance thereof (including

any refinancing of Senior Indebtedness pursuant to an Insolvency Proceeding) and

to the payment of all debt securities issued in exchange for such Senior

Indebtedness in such Insolvency Proceeding (whether such subordination is

effected by the terms of such securities, an order or decree issued in such

Insolvency Proceeding, by agreement of the Term Lenders or otherwise), or (b)

equity securities that are issued pursuant to an Insolvency Proceeding;

provided, in either case, that such securities are authorized by an order or

decree made by a court of competent jurisdiction in such Insolvency Proceeding.

 

 

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     "Required Senior Revolving Lenders" means Senior Revolving Lenders holding

at least sixty-six and two-thirds percent (66-2/3%) of the outstanding Senior

Indebtedness, or if no principal amount of Loans or letters of credit is then

outstanding, Senior Revolving Lenders holding at least sixty-six and two-thirds

percent (66-2/3%) of the total commitments.

 

     "Senior Indebtedness" means and includes (a) all principal indebtedness for

loans now outstanding or hereafter incurred, and all letter of credit

reimbursement obligations now existing or hereafter arising, under the Senior

Revolving Credit Agreement, provided that the aggregate outstanding principal

amount of Senior Indebtedness under this clause (a) shall not exceed

$350,000,000 at any time, and provided further, that if the aggregate principal

amount of Senior Indebtedness (constituting principal and letter of credit

reimbursement obligations) shall exceed $350,000,000, then the subordination of

the Term Notes as contemplated by this Agreement to the Senior Indebtedness of

$350,000,000 or less shall not be impaired, (b) all amounts now or hereafter

owing to any of the Senior Revolving Lenders or any of their Affiliates under

any Eligible Swap Agreement, (c) all interest accruing on the Senior

Indebtedness described in the preceding clauses (a) and (b), and (d) all other

monetary obligations (whether now outstanding or hereafter incurred) for which

either of the Borrowers or any Guarantor is responsible or liable as obligor,

guarantor or otherwise under or pursuant to any of the Senior Revolving Credit

Documents including, without limitation, all fees, penalties, yield protections,

breakage costs, damages, indemnification obligations, reimbursement obligations,

and expenses (including, without limitation, fees and expenses of counsel to the

Senior Indebtedness Representative and the Senior Revolving Lenders) together

with interest on the foregoing to the extent provided for in the Senior

Revolving Credit Documents. The interest described in the preceding clause (c)

and the premiums and penalties described in the preceding clause (d) include,

without limitation, all interest accruing after the commencement of any

Insolvency Proceeding under the terms of the Senior Revolving Credit Documents

whether or not such interest constitutes an allowed claim in any such Insolvency

Proceeding.

 

     "Senior Indebtedness Acceleration" means with respect to the Senior

Indebtedness that the holder or holders of such Senior Indebtedness, or an agent

or representative on behalf of such holder or holders, have caused the maturity

of such Senior Indebtedness to be accelerated.

 

     "Senior Indebtedness Default" means a Payment Default or a Non-Payment

Default.

 

     "Senior Indebtedness Representative" means (a) initially, Citibank Texas,

N.A., as administrative agent for the Senior Revolving Lenders under the Senior

Revolving Credit Agreement or (b) such other Person selected by the Majority

Lenders (as such term is defined in the Senior Revolving Credit Agreement) to

replace Citibank Texas, N.A. or the then Senior Indebtedness Representative.

 

     "Senior Revolving Credit Agreement" means that certain Second Amended and

Restated Credit Agreement dated as of the September 27, 2004 among the

Borrowers, Citibank Texas, N.A. (formerly known as First American Bank, SSB), as

administrative agent and the financial institutions listed therein from time to

time as Senior Revolving Lenders, as amended by that First Amendment, dated

December 15, 2004, the Second Amendment, dated April 1, 2005, the Third

Amendment, dated October 13, 2005 and the Fourth Amendment, dated November 15,

2005, and as from time to time hereafter renewed, extended, amended,

supplemented, or restated,

 

 

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and any agreements representing the refinancing, replacement, or substitution in

whole or in part of the revolving credit loans and letter of credit liabilities

made or incurred under such Senior Revolving Credit Agreement.

 

     "Senior Revolving Credit Documents" means, collectively, (a) the Senior

Revolving Credit Agreement and the Eligible Swap Agreements, (b) any note, bond

or other instrument evidencing Senior Indebtedness, (c) all mortgages, security

agreements, pledge agreements or financing statements evidencing, creating or

perfecting any Lien to secure the Senior Indebtedness in any way, (d) all

guarantees of the Senior Indebtedness, (d) all other documents, instruments or

agreements relating to the Senior Indebtedness now or hereafter executed or

delivered by and among the Borrower, any Subsidiary, the Senior Indebtedness

Representative or any Senior Revolving Lender or any Affiliate thereof,

including without limitation each of the other the "Loan Documents" as such term

is defined in the Senior Revolving Credit Agreement, and (e) all renewals,

extensions, amendments, modifications or restatements of the foregoing.

 

     "Senior Revolving Lenders" means all Persons which now or hereafter

constitute a "Lender" under the Senior Revolving Credit Agreement and their

respective successors and assigns, and all Persons refinancing any Senior

Indebtedness and their respective successors and assigns.

 

     "Standstill Period" means the period beginning with the commencement of a

Blockage Period and ending on the earliest of (a) the date when the Senior

Indebtedness Default giving rise to such Blockage Period has been cured or

waived in writing, (b) the date of the repayment in full in cash of the Senior

Indebtedness, (c) the date that is 179 days after the commencement of a Blockage

Period, (d) the end of the Non-Payment Blockage Period applicable to a

Non-Payment Default, (e) the date on which the Senior Indebtedness shall have

been declared due and payable prior to its stated maturity or any holder of

Senior Indebtedness commences proceedings to collect any Senior Indebtedness or

realize upon any material part of the collateral for any Senior Indebtedness and

(f) the date upon which any Insolvency Proceeding is commenced.

 

     "Subordinated Obligations" means any and all indebtedness (whether for

principal, interest, fees, indemnifications or otherwise, but not expenses) now

or hereafter owing by the Borrowers or any Subsidiary under or in connection

with the Term Loan Agreement, the Term Notes, any other Term Loan Document or

any mortgage, guaranty or other security instrument given in connection

therewith, and any letter agreement or other agreement providing for payment of

fees in connection therewith.

 

     "Subordinated Administrative Agent" means BNP Paribas, in its capacity as

administrative agent for the Term Lenders under the Term Loan Agreement,

together with any successors in such capacity.

 

     "Term Lenders" means all Persons which now or hereafter constitute a

"Lender" under the Term Loan Agreement and their respective successors and

assigns, and all Persons refinancing any Subordinated Obligations and their

respective successors and assigns.

 

     "Term Loan Agreement" means that certain Second Lien Term Loan Agreement

dated as of November 15, 2005 among the Borrower, BNP Paribas, as administrative

agent and the

 

 

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financial institutions listed therein from time to time as Term Lenders, as from

time to time renewed, extended, amended, supplemented, or restated, and any

agreements representing the refinancing, replacement, or substitution in whole

or in part of the loans made or incurred under such Term Loan Agreement.

 

     "Term Loan Documents" means, collectively, (a) the Term Loan Agreement, (b)

the Term Notes and any other note, bond or other instrument evidencing

Subordinated Obligations, (c) all mortgages, security agreements, pledge

agreements or financing statements evidencing, creating or perfecting any Lien

to secure the Term Loan Agreement and the Term Notes in any way, (d) all

guarantees thereof, (d) all other documents, instruments or agreements relating

to the Term Loan Agreement or the Term Note now or hereafter executed or

delivered by and among the Borrower, any Subsidiary, the Subordinated

Administrative Agent or any Term Lender, including without limitation each of

the other the "Loan Documents" as such term is defined in the Term Loan

Agreement, and (e) all renewals, extensions, amendments, modifications or

restatements of the foregoing.

 

     "Term Notes" means each promissory note issued under the Term Loan

Agreement evidencing the term loans made pursuant to the term thereof, as from

time to time renewed, extended, amended, supplemented, or restated, and any

agreements representing the refinancing, replacement, or substitution in whole

or in part thereof.

 

                                  ARTICLE XIV

                                  SUBORDINATION

 

     Section 14.01 Subordination of Obligations; Permitted Payments.

 

          (a) Subordination of Obligations. The Borrowers and each Subsidiary

covenant and agree, and each Term Lender covenants and agrees, that the payment

of the Subordinated Obligations shall, to the extent set forth in this

Agreement, be subordinate and junior and subject in right of payment to the

prior payment in full in cash of all Senior Indebtedness, whether outstanding on

the date hereof or hereafter created, incurred, assumed or guaranteed. Except as

otherwise specifically provided herein, neither of the Borrowers nor any

Subsidiary may make, and no Term Lender shall accept, receive or collect, any

direct or indirect payment or distribution of any kind or character (in cash,

securities, other Property, by setoff or otherwise other than Reorganization

Securities) of any properties or assets of the Borrowers or any Subsidiary on

account of or in respect to the Subordinated Obligations until the holders of

the Senior Indebtedness have been paid in full in cash (subject to reinstatement

under Section 14.10).

 

          (b) Permitted Payments. Except under circumstances when the terms of

Section 14.02, Section 14.03, or Section 14.05 hereof are applicable, the

Borrowers may make and the Term Lenders may accept periodic payments scheduled

under the terms of the Term Loan Documents (as in effect on the date hereof or

as amended consistent with the provisions hereof) excluding any payments

required upon accelerated maturity of the Term Notes (a "Scheduled Payment").

 

 

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     Section 14.02 Payment Default or Acceleration. Except under circumstances

when the terms of Section 14.05 of this Agreement are applicable, if (a) a

Payment Default or Senior Indebtedness Acceleration shall have occurred and be

continuing and (b) the Term Lenders or the Subordinated Administrative Agent or

other representative shall have been furnished a Payment Default Notice, then

neither of the Borrowers nor any Subsidiary may make, and no Term Lender shall

accept, receive or collect, any direct or indirect payment or distribution of

any kind or character (in cash, securities, other Property, by setoff, or

otherwise other than Reorganization Securities) of any properties or assets of

the Borrowers or any Subsidiary on account of the Subordinated Obligations

during the Payment Blockage Period; provided, however, that in the case of any

Scheduled Payment on or in respect of any Subordinated Obligation that would (in

the absence of any such Payment Default Notice) have been due and payable on any

date (a "Scheduled Payment Date") during such Payment Blockage Period pursuant

to the terms of the Term Notes as in effect on the date hereof or as amended

consistent with the provisions of this Agreement, the provisions of this Section

14.02 shall not prevent the making and acceptance of such Scheduled Payment,

together with any additional default interest as is due on the Term Notes, on or

after the date immediately following the termination of such Payment Blockage

Period. In the event that, notwithstanding the foregoing, either the Borrowers

or any Subsidiary shall make any payment or distribution to any Term Lender

prohibited by the foregoing provisions of this Section 14.02, then and in such

event such payment or distribution shall be held in trust for the benefit of and

immediately shall be paid over to the holders of the Senior Indebtedness or the

Senior Indebtedness Representative for application against the Senior

Indebtedness remaining unpaid until such Senior Indebtedness is paid in full in

cash.

 

     Section 14.03 Non-Payment Default. Except under circumstances when the

terms of Section 14.02 or Section 14.05 of this Agreement are applicable, if (a)

a Non-Payment Default shall have occurred and be continuing, (b) the Term

Lenders or the Subordinated Administrative Agent or other representative shall

have been furnished a Non-Payment Default Notice and (c) no Non-Payment Default

Notice shall have been given within the 360 day period immediately preceding the

giving of such Non-Payment Default Notice, then neither the Borrowers nor any

Subsidiary may make, and no Term Lender shall accept, receive or collect, any

direct or indirect payment or distribution of any kind or character (in cash,

securities, other Property, by setoff, or otherwise other than Reorganization

Securities) of any properties or assets of the Borrowers or any Subsidiary on

account of the Subordinated Obligations during the Non-Payment Blockage Period;

provided, however, that in the case of any Scheduled Payment on or in respect of

any Subordinated Obligation that would (in the absence of any such Non-Payment

Default Notice) have been due and payable on any Scheduled Payment Date during

such Non-Payment Blockage Period pursuant to the terms of the Term Notes as in

effect on the date hereof or as amended consistent with the requirements of this

Agreement, the provisions of this Section 14.03 shall not prevent the making and

acceptance of such Scheduled Payment, together with any additional default

interest as is due on the Term Notes, on or after the date immediately following

the termination of such Non-Payment Blockage Period. In the event