What is negative pledge ?

Negative pledge is a provision in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision.

A negative pledge is really not a pledge at all. A negative pledge is a promise by a borrower to not allow any liens to be placed upon some or all of the borrower's assets. Negative pledge language is often found in standard bank loan agreements as one of many covenants (promises) made by the borrower

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On financial term, A negative pledge is really not a pledge at all.  A negative pledge is a promise by a borrower to not allow any liens to be placed upon some or all of the borrower’s assets.  Negative pledge language is often found in standard bank loan agreements as one of many covenants (promises) made by the borrower.  As with other covenants in the loan agreement, violation of a negative pledge is usually an event of default.  A negative pledge can also be a standalone document.  Frequently stand alone documents are for negative pledges of real estate assets and are in a form that allows recording in the real estate records of the county in which the subject real estate is located.

A negative pledge clause is lending agreement language designed to prevent borrowers from pledging the same collateral to multiple lenders or otherwise taking actions that might jeopardize the security of existing lenders.

For example, let's assume that Company XYZ borrows $10 million from Bank A. Bank A requires Company XYZ to pledge all $7 million of its factory assets and some of its securities as collateral for the loan. The lending agreement includes a negative pledge clause. Later, Company XYZ wants to borrow $2 million from Bank B. Bank B wants Company XYZ to pledge $1 million of factory assets as collateral for the loan. Because Company XYZ has a negative pledge clause in its loan agreement with Bank A, Company XYZ cannot pledge the $1 million of collateral, because doing so would reduce Bank A's security. Company XYZ might choose to pledge other assets to Bank B, ask Bank B for an unsecured loan if it has no other collateral to offer, or try to renegotiate its collateral agreement with Bank A.

However , Negative pledge clauses are generally intended to ensure that a bank does not suffer from the subsequent actions of the borrower. Without such clauses, borrowers might have the option to pledge the same collateral to multiple lenders. In the event of default, these lenders would scramble to recover the same collateral. 

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