Negative Pledge Clause

DEFINITION of 'Negative Pledge Clause'

A negative covenant in an indenture stating that the corporation will not pledge any of its assets if doing so gives the lenders less security. Also be referred to as a "covenant of equal coverage".

BREAKING DOWN 'Negative Pledge Clause'

A negative pledge clause is just another way for bondholders to protect their investment. By including a negative pledge clause in a bond indenture, the bondholders of the current bond issue prevent the company from issuing any debt in the future which would jeopardize their current priority claim on the company's assets.

Including a negative pledge cause in a bond indenture increases the safety of the bond issue from the investors' perspective, and therefore often allows the bond issuer to borrow funds at a slightly lower interest rate.

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