Can you give me an example of the negative pledge provision works? - ProProfs Discuss
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Can you give me an example of the negative pledge provision works?

Asked by Aaliyah, Last updated: Sep 20, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

NPP example: Adebenture is issued with a negative pledge provision. The provision ensures that if the company issues any subsequent mortgage bond, then the company must allow for the debenture with the npp to also be equally secured. This provides a measure of safety to the debenture holder. The last thing the debenture holder wants is to buy the security and then have the company issue more mortgage bonds that will rank ahead of the debenture, weakening the debentures claim to assets. The NPP prevents this from happening. When debentures are issued, a common provision states that no subsequent mortgage bond issue may be secured by all or part of the company's properties, unless at the same time the debentures are similarly secured by the mortgage.

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