You are reading the undertakings section of your term sheet. One of the conditions is the Negative pledge covenant. Here is what it controls, why the bank includes it, and what to check before you sign.
What the bank is measuring
A negative pledge prohibits the borrower from granting security interests (mortgages, liens, pledges) over its assets to other creditors. It protects the lender’s priority claim in an unsecured facility.
What this means: Cannot use company assets as collateral for other loans without the lender’s consent. This limits alternative financing options and may prevent asset-backed borrowing for specific needs.
What to check
Carve-outs: typically permits purchase money security interests (equipment financing) and existing liens
Scope: does it cover all group entities or only the borrower?
Interaction with additional debt restriction — these two covenants usually work together
How to negotiate
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Negative pledge covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.
What to do next
The fastest way to see whether a Negative pledge covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
Analyse your term sheetFrequently asked questions
What is a Negative pledge covenant?
A negative pledge prohibits the borrower from granting security interests (mortgages, liens, pledges) over its assets to other creditors. It protects the lender’s priority claim in an unsecured facility.
What does a Negative pledge covenant restrict?
Cannot use company assets as collateral for other loans without the lender’s consent. This limits alternative financing options and may prevent asset-backed borrowing for specific needs.
Can you negotiate a Negative pledge covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Negative pledge covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.