Can someone explain the negative pledge clause in layman’s terms? Thanks
which section is this about?
When a company goes bankrupt, bondholders get paid off based on seniority and collateralization of the debt. Seniority just means that there is a heirarchy of debt - some debt has a better claim on available resources than other debt and bankruptcy judges recognize that when doling out money. Debt that is colleteralized has a claim on some asset (like a power plant) and like your home mortgage the debt holders can take the power plant and sell it theoretically. A negative pledge in a bond indenture says that the company shall issue no debt which could jeopardize your spot in the pecking order for assets if the company goes bust. Thus, all debt they issue until they retire yours needs to have less claim on everything than you do.
BTW - A negative pledge clause is one reason that company’s call debt when it would be otherwise disadvatageous to do it.
JoeyDVivre Wrote: ------------------------------------------------------- > BTW - A negative pledge clause is one reason that > company’s call debt when it would be otherwise > disadvatageous to do it. Joey… is that also the reason why Nonrefundable bonds evolved?
As far as I know a negative pledge is something that interdicts you to take certain actions that would downrate/create more risk on an existing bond issue, like in Joey’s example the affirmative convenants are things that the issuers say they will do- i’'d like some examples here if sombody could but I would assume they refer to for example creating a sinking fund, keeping a ROA above a mark , debt ratio below a procentage etc
florinpop are you a lawyer??? “interdicts” ouch! my head hurts
cpk123 no I’m not but I’m not canadian/american either and my english might not be too good 
what I meant is restricts
no the english is perfectly fine, haven’t heard that word other than in Perry Mason books I used to read and enjoy a long time ago (when I was not doing the CFA curriculum). and my head hurts because of futures/forwards/swaps/options all playing hell with my FSA stuff and all concepts dwindling down like that big blackout… I am screaming gibberish now as well.
Come on Cpk123 if anybody would pass the exam from this forum that would be you. For sure.i’ll bet my money on it
^me to in the bet for whatever little, non-collaterized, amount that I possess till date…
florinpop Wrote: ------------------------------------------------------- > As far as I know a negative pledge is something > that interdicts you to take certain actions that > would downrate/create more risk on an existing > bond issue, like in Joey’s example > the affirmative convenants are things that the > issuers say they will do- i’'d like some examples > here if sombody could but I would assume they > refer to for example creating a sinking fund, > keeping a ROA above a mark , debt ratio below a > procentage etc Don’t confuse negative pledges with negative covenants. A negative covenant is indeed a promise not to do something like pay dividends greater than some amount to shareholders. A negative pledge specifically deals with issuing more debt, especially debt that pledges assets that would otherwise be available for the current bondholder.
dinesh.sundrani Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > BTW - A negative pledge clause is one reason > that > > company’s call debt when it would be otherwise > > disadvatageous to do it. > > Joey… is that also the reason why Nonrefundable > bonds evolved? Beyond my history of finance expertise…
ok thanks Joey