Negative Pledge

This is a form of security usually given by blue chip companies. There is no formal charge over company's assets, but rather a written undertaking by the borrowing company that it will not charge any of its assets to any other lender without the bank's consent.

Advantages of Negative pledge to the bank

i.  It can be easily taken
ii.  It is not expensive to perfect.
iii. If the borrower's external financing         is much lower than the worth of its         assets, the risk is reduced since there       will be enough for all the creditors.
iv. The higher the repayments, the                 lower the lender's risk.
v. If the terms and conditions of the              security are complied with, the                  borrower's penchant to borrow and        pick up debts is reduced.
vi. The higher the borrower's hidden              /secret reserve, the stronger the                security.

Disadvantages/risks to the bank

i.  It is a weak security.
ii. The security does not attach any                specific assets.
iii. In the event of the borrower's                   liquidation, the unattached assets             could be seized and disposed off by         the liquidator.
iv. In effect of winding up of the                     company, the bank can only prove           as an unsecured creditor.
v. If the company's unattached assets         are insufficient to cover it's liabilities,     the bank might be unable to recover       its total exposure.
vi. Any legal charge subsequently                  created by the borrower in regard to      the existing negative pledge takes            precedence over the bank's security.