Negative pledges

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Negative pledges
  • What is a negative pledge?
  • The purpose of a negative pledge clause
  • Why are negative pledges important to unsecured lenders?
  • Why are negative pledges important to secured lenders?
  • Protecting a lender's floating charge
  • Putting third parties on notice of a negative pledge provision
  • Consequences of breach of a negative pledge provision
  • Consequences for the third party
  • Automatic security clauses
  • More...

Negative pledges

This Practice Note examines:

  1. why negative pledge clauses are used in commercial transactions

  2. the consequences of breaching negative pledge provisions

  3. how negative pledges are viewed in the context of security and quasi-security, and

  4. key considerations when drafting a negative pledge clause

Where appropriate, this Practice Note highlights relevant provisions in Precedent: Facility agreement (term loan): single company borrower—bilateral—with or without security or a guarantee and the Loan Market Association (LMA) investment grade multicurrency term facility agreement (the LMA facility agreement) (available to LMA members on the LMA website).

The Association of Corporate Treasurers (ACT) Borrower’s Guide to the LMA’s Investment Grade Agreements (2017) contains useful guidance on the negative pledge provision in clause 22.3 (Negative pledge) of the LMA facility agreement. Registration at the ACT website is required to access the guide. The LMA's user guides (available in the 'Documents & Guidelines' section of its website) also provides useful guidance on the negative pledge drafting in LMA documents.

What is a negative pledge?

A negative pledge is a contractual undertaking which prohibits or restricts the promisor from creating encumbrances over its assets. In lending transactions, a negative pledge is commonly given by the borrower to the lender and it is often one of the most important negative undertakings in a facility agreement.

For information on undertakings generally, including the other types of undertakings which are typically

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