What is a negative pledge clause?

A negative pledge clause is a provision in a loan agreement that prohibits the borrower from creating additional security interests (such as fixed charges) over specified assets, thereby safeguarding the lender's interest in those assets. It essentially ensures that the borrower will not encumber the specified assets with further debt that could diminish the lender's security or claim priority.

This type of clause is important for lenders as it helps maintain the position of their claim on the borrower's assets. By preventing the borrower from granting a fixed charge to another lender, the existing lender can protect their investment and maintain the priority of their claims in the event of a default.

Compared to the other options, a negative pledge clause specifically addresses the issue of securing additional interests and helps to keep the borrower's asset base free from restrictions that could compromise the lender's rights. In contrast, other choices like those allowing fixed charges or enhancing creditor rights do not align with the fundamental intent of a negative pledge clause, which is to prevent further encumbrance on assets already pledged.