Negative pledge clause

The negative pledge clause prohibits the borrower from granting security to other financial creditors without extending it, at the same rank, to the lenders or holders that stipulate it. Its purpose is to keep the loan at its rank: investors in unsecured debt want the same treatment as the other creditors of the same rank and nature. The bond template of the Euro PP Charter of October 2019 sets it along three variables: the entities concerned (issuer alone, issuer and material subsidiaries, or all subsidiaries), the debt covered (bond, bank or financial debt) and the security covered, over assets or personal, as well as quasi-security. Quasi-security covers the sale of assets intended to be leased back, the sale of receivables with recourse and the allocation of an account to a set-off, when the transaction serves to raise debt. In a Euro PP, the clause covers the subsidiaries and the issuer’s bank debt. The negotiation covers the exceptions: existing security listed in an appendix, security granted with the consent of the body of holders (masse), retention of title and set-off rights in the ordinary course of business, caps on amounts. For the borrower, the clause is drafted consistently with those of its other financings, particularly for acquisitions, so that a new secured loan does not trigger a default on the existing debt.

A mid-sized company has issued an unsecured €50m Euro PP with a negative pledge over the group. It wants to finance an acquisition with a €40m loan secured by a pledge over the target’s shares. It obtains the consent of the holders’ meeting. In exchange, the holders receive a fee of 0.25% of the principal.

• The entities covered: issuer alone, material subsidiaries or all subsidiaries.
• The debt covered: bonds, bank debt or any financial debt.
• The list and caps of existing security and permitted security.
• Consistency with the clauses of the group’s other financing agreements.