negative covenant

Negative Covenant

A bond covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders. Also referred to as "restrictive covenant".

Notes:

Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a bond issue, the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors.

See also: Bond, Covenant, Indenture, Negative Pledge Clause

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Negative covenant

A bond covenant that limits or prohibits certain actions unless the bondholders agree.

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negative covenant

A clause in a loan agreement that prohibits the borrower from an activity. For example, a negative covenant may restrict the payment of dividends or the issuance of new debt. Compare positive covenant.