Negative Covenant


DEFINITION of 'Negative Covenant'

A bond covenant preventing certain activities, unless agreed to by the bondholders. Negative covenants are written directly into the agreement creating the bond issue, are legally binding on the issuer, and exist to protect the best interests of the bondholders. Also referred to as "restrictive covenant".

BREAKING DOWN 'Negative Covenant'

Think of a negative covenant as a promise not to do something. Usually, negative covenants limit the amount of dividends a firm can pay to shareholders and restrict the ability of the firm to issue additional debt. Generally, the more negative covenants exist in a bond issue, the lower the interest rate on the debt will be since the restrictive covenants make the bonds safer in the eyes of investors.

  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Indenture

    A legal and binding contract between a bond issuer and the bondholders. ...
  3. Restrictive Covenant

    Any type of agreement that requires the buyer to either take ...
  4. Negative Pledge Clause

    A negative covenant in an indenture stating that the corporation ...
  5. Covenant

    A promise in an indenture, or any other formal debt agreement, ...
  6. Debt Limitation

    A bond covenant that limits or restricts any additional debt ...
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