What is a Negative Pledge?

What is a Negative Pledge?

How do creditors know they will get what they're owed when a company defaults? How do they know that other equal creditors won't receive more than them? A negative pledge creates creditor equality at a given level of a company’s capital structure by ensuring that no other creditor is better off than any other in liquidation. In this video James explains the concept of a negative pledge in more detail. 
Overview

A negative pledge is a clause in lending documentation to ensure investors and lenders are protected against borrowers from the unequal provision of security over a company’s assets to individuals within the same tranche of a credit hierarchy.

Key learning objectives:

  • Define negative pledge

  • Explain the purpose of a negative pledge

  • Understand who a negative pledge protects

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