Negative Pledge

(redirected from Negative Pledge Clauses)

Negative Pledge

An agreement in which the borrower agrees not to pledge any of its assets as security and/or not to incur further indebtedness.

Negative Pledge

A negative covenant in a bond indenture in which the issuer agrees not to use any of its assets as security for another debt obligation or other liability if doing so would adversely impact the riskiness of the bond. This protects bondholders and also allows the issuer to pay a lower coupon rate.
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The use of exit consents worked well in Ecuador in 2000, where exiting bondholders agreed to remove cross-default and negative pledge clauses.
However, a loan with an assignment of export proceeds could have achieved the same purpose and, in the case of the UBS/BPOI facility, the main reason for electing the pre-payment structure was actually to circumvent negative pledge clauses present in other Angolan transactions which prevented Sonangol from assigning its right to receivables from oil contracts.
Buyers look to those issuers that have limitations on debt incurrence or restricted payments, tests, and strong negative pledge clauses not typically found in investment grade deals.