Negative Pledge Clause
What is a Negative Pledge Clause?
Negative Pledge Clause Example
For example, let's assume that Company XYZ borrows $10 million from Bank A. Bank A requires Company XYZ to pledge all $7 million of its factory assets and some of its securities as loan. The lending agreement includes a negative pledge clause.
Later, Company XYZ wants to borrow $2 million from Bank B. Bank B wants Company XYZ to pledge $1 million of factory assets as collateral for the loan. Because Company XYZ has a negative pledge clause in its loan agreement with Bank A, Company XYZ cannot pledge the $1 million of collateral, because doing so would reduce Bank A's security. Company XYZ might choose to pledge other assets to Bank B, ask Bank B for an unsecured loan if it has no other collateral to , or try to renegotiate its collateral agreement with Bank A.