Negative Covenant

Covenants in loan and bond documents can be negative or positive. Negative covenants are those that restrict the borrower from engaging in certain actions, such as raising certain types of financing, engaging in asset sales, taking cash out of the company, or encumbering or pledging assets. Negative covenants can also prevent borrowers from exceeding certain financial and performance caps. Negative covenants contrast with positive covenants, which require borrowers to meet certain standards, including the release of regular financial statements, maintaining property, plant and equipment, or putting on hedges to protect against interest rate of FX exposure.