What Is Negative Pledge Agreement

Later, XYZ Company plans to borrow $2 million from Bank B. Bank B wants XYZ Company to pledge $1 million in factory assets as collateral for the loan. Since XYZ Company has a negative collateral clause in its loan agreement with Bank A, XYZ Company cannot pledge the $1 million as collateral, as this would reduce Bank A`s collateral. XYZ Company may choose to pledge other assets to Bank B, apply to Bank B for an unsecured loan if it has no other collateral to offer, or attempt to renegotiate its guarantee agreement with Bank A. In Australia, negative lending increased following a major agreement by Pioneer Concrete in 1978. [1] It was a new way of lending that allowed banks to lend to businesses, which was once the domain of life insurers. Negative pawn clauses are almost universal in modern unsecured trade credit documents. The goal is to ensure that a borrower who has taken out an unsecured loan cannot subsequently take out another loan from another lender, thereby securing the subsequent loan on the specified assets. If the borrower could do so, the original lender would be at a disadvantage because in the event of default, the subsequent lender would have recalled the assets first. For example, suppose XYZ Company borrows $10 million from A. Bank A, XYZ Company pledges all of its factory assets and some of its securities as collateral for the loan. The loan agreement contains a negative pledge clause.

A negative collateral clause is a type of restrictive covenant that prevents a borrower from pledging assets if it would compromise the lender`s collateral. This type of clause can be part of traditional bonds and credit structures. how negative promises are perceived in the context of security and quasi-security, and the fair privilege argument is unlikely to succeed in the context of negative pledge promises. .

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