Negative Covenant

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.

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Negative Covenant

A bond covenant that forbids the issuer from taking certain actions. For example, a negative covenant may prevent an issuer from issuing more debt until the bond matures. More commonly, a negative covenant limits the dividends an issuer may pay to shareholders so as to reduce the risk to the bond. It contrasts with a positive covenant, which requires the issuer to take certain enumerated actions. It is also called a restrictive covenant.