A negative covenant in a loan agreement or other debt instrument pursuant to which a borrower agrees on behalf of itself, and in some cases, its subsidiaries, not to create or allow the creation or imposition of any security interests, liens, or other encumbrances on its assets or certain specified properties. A negative pledge provision protects the lender by prohibiting the borrower from granting a lien or a security interest to another creditor which would:
Reduce the amount of security or collateral available to the lender.
Give the other creditor priority on the borrower’s assets or properties if a bankruptcy of the borrower occurs.
Negative pledge provisions are highly negotiated and often subject to numerous exceptions.
