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.
What is a Negative Pledge?
1 min 36 secs
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
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.
Tim Skeet
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