Negative pledge

A negative pledge is an undertaking by a borrower not to create, or permit to subsist, security over its assets in favour of other creditors, except as the facility agreement allows. In unsecured lending it protects the pool of unencumbered assets. In secured deals it preserves the priority and integrity of the agreed security package.

How the negative pledge is used on PF and CRE desks

Project finance and CRE credit teams treat the negative pledge as a core negative covenant alongside limits on debt, disposals, and distributions. AFME lists a negative pledge among the collateral and covenant tools that let lenders control project assets and cash flows, together with share pledges, asset security, contract assignments, and account pledges.

The ACT Borrower's Guide to LMA investment grade documentation states that, in an unsecured facility, the purpose of the negative pledge is to prevent the borrower from granting security that would prefer other creditors. LMA Clause 22.3 combines a broad prohibition on Security with restrictions on "Quasi-Security" (sale and leaseback, recourse factoring, preferential set-off and similar arrangements whose primary aim is to raise financial indebtedness or finance an asset purchase), plus negotiated exceptions.

CABRI describes the same undertaking in loan and bond markets: the borrower promises not to create security for other creditors, with scope driven by the definition of indebtedness and available carve-outs.

Mechanics and institutional forms

Commercial negative pledges usually:

• prohibit new liens, charges, mortgages, and pledges without consent
• catch quasi-security that creates a preferential effect
• list permitted exceptions (existing security, ordinary-course netting, purchase-money security, trade-finance pledges, agreed baskets)
• treat breach as a covenant breach and potential event of default

Some formulations require that if security is granted to another creditor, the existing lenders must be equally and ratably secured. That equal-security variant is close to, but distinct from, a pure prohibition.

World Bank IBRD General Conditions for Investment Project Financing contain an institutional negative pledge (Section 6.02). IBRD policy is generally not to take special security from member countries, while ensuring that other covered debt does not obtain priority in the allocation of foreign exchange. If a lien is created on public assets as security for covered debt in a way that could prefer that creditor, the lien must, unless the Bank agrees otherwise, equally and ratably secure loan payments to the Bank. Stated exceptions include purchase-money liens and liens arising in the ordinary course of banking transactions that secure debt maturing within one year.

Distinctions

A negative pledge restricts future security. It does not itself create a fixed and floating charge or debenture. Pari passu addresses ranking of claims; the negative pledge addresses the creation of preferential collateral. Bond-style negative pledges often focus on securing other capital markets debt on equal terms, whereas loan-style wording is typically a broader prohibition subject to exceptions.