Negative Covenant
Corporate Credit Analysis glossary · Credit Agreements & Covenants
Definition
A covenant prohibiting the borrower from taking specified actions; common negative covenants restrict additional debt, dividends, asset sales, fundamental changes, transactions with affiliates, and modifications to senior debt.
Negative Covenant in plain English
A negative covenant is a list of things the borrower promises NOT to do while the loan is outstanding — its whole job is to stop the company from doing anything that would quietly make the lender's position riskier. Typical bans include taking on lots of extra debt, paying big cash dividends to owners, selling off valuable assets, or cutting sneaky deals with insiders. It's like a parent lending the car on the condition that you don't take it out of state, don't lend it to friends, and don't rip out the stereo — rules that protect the thing the lender still has a claim on.
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