What is a Negative Pledge?

What is a Negative Pledge?

Tim Skeet

35 years: Debt capital markets

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 Tim explains the concept of a negative pledge in more detail. 

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 Tim explains the concept of a negative pledge in more detail. 

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What is a Negative Pledge?

1 min 36 secs

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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Summary

What is a negative pledge?

A “negative pledge” is a standard clause in lending and securities documentation. It is what is known as a negative covenant. A negative covenant is one that prevents borrowers from taking certain courses of action.

What is the purpose of a negative pledge?

A negative pledge is a feature that affords lenders and investors certain protections. By inserting a negative pledge into documentation, companies are not permitted to contractually grant otherwise equally-ranked creditors specific collateral against their borrowings to the detriment of other creditors at the same level of the repayment hierarchy.

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.

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This content is also available as part of a premium, accredited video course. Sign up for a 14-day trial to watch for free.

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