What is a Negative Pledge?

A negative pledge is a type of clause in a financial contract that states that the company that is borrowing money will not pledge its assets to any other debt if it negatively affects the current lenders. This type of clause is commonly used in bond indentures when corporations are issuing corporate bonds.

Features

As an investor, a negative pledge is seen as a positive feature of a bond issue. When a company includes a negative pledge in their bond indenture, it means that they will not issue any new debt in the future with the same assets tied to it. This increases the amount of safety for the investor because it ensures that they will always have assets that are tied to their particular bond. If the company goes out of business, their assets will be used to repay the principal to the investor.

Interest Rate

When a company includes a negative pledge in their bond indenture, they can usually get a lower interest rate on the money that they borrow from investors. Since the risk has been reduced for the investors, the company can then ask for lower interest rates on the bonds that they issue with this clause attached.

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