Negative covenant
A restriction on what a borrower may not do — borrow past a ratio, pledge assets elsewhere, pay large dividends. The covenants that actually protect recovery.
Where you will meet it
Negative covenant appears in 2 learning outcomes on the CFA syllabus. A few of them:
- Explain what a bond indenture is and the positive and restrictive covenants in it
“Negative covenants state what it must not do: incur debt beyond a stated ratio, pledge assets to other lenders, sell major assets, or pay dividends above a limit.”
- Say why debt covenants exist and what they do
“Negative covenants forbid them: additional borrowing beyond a limit, asset sales, dividends above a level.”
See also
Practise it
Practise negative covenant until it is automatic: questions that explain every wrong option.
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