Negative pledge

Negative pledge is a provision in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision.

Negative pledges often appear in security documents, where they operate to prohibit the person who is granting the security interest from creating any other security interests over the same property, which might compete with (or rank pari passu with) the security of the first secured creditor under the security document in which the negative pledge appears.

In Australia, negative pledge lending took off after a substantial deal by Pioneer Concrete in 1978.[1] It was a new way of lending, which allowed the banks to lend to corporations, something previously the domain of life insurers.

Negative pledge clauses are almost universal in modern unsecured commercial loan documents. The purpose is to ensure that a borrower, having taken out an unsecured loan, cannot subsequently take out another loan with a different lender, securing the subsequent loan on the specified assets. If the borrower could do this, the original lender would be disadvantaged because the subsequent lender would have first call on the assets in an event of default.

See also

References

  1. ^ Trevor Sykes, The Bold Riders, second edition, 1996, ISBN 1-86448-184-6, pages 7-10

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Look at other dictionaries:

  • negative pledge — An undertaking given by a borrower to a bank not to create any other secured indebtedness, (whether ranking before or after the bank) without its consent usually as part of the bank s standard documents Easyform Glossary of Law Terms. UK law… …   Law dictionary

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  • negative pledge — promise not to mortgage property …   English contemporary dictionary

  • negative pledge — A covenant in a loan agreement in which a borrower promises that no secured borrowings will be made during the life of the loan or will ensure that the loan is secured equally and ratably with any new borrowings as specifically defined …   Accounting dictionary

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  • Negative Pledge Clause — A negative covenant in an indenture stating that the corporation will not pledge any of its assets if doing so gives the lenders less security. Also be referred to as a covenant of equal coverage . A negative pledge clause is just another way for …   Investment dictionary

  • Negative pledge clause — A bond covenant that requires the borrower to grant lenders a lien equivalent to any liens that may be granted in the future to any other currently unsecured lenders. The New York Times Financial Glossary …   Financial and business terms

  • negative pledge clause — A bond covenant that requires the borrower to grant lenders a lien equivalent to any liens that may be granted in the future to any other currently unsecured lenders. Bloomberg Financial Dictionary …   Financial and business terms

  • negative pledge clause — Fin a provision in a bond that prohibits the issuer from doing something that would give an advantage to holders of other bonds …   The ultimate business dictionary


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