What Is Negative Assurance?

The negative guarantee clause is an important clause commonly found in various types of international loan agreements. The basic contents are as follows: During the loan period, the borrower shall not arrange new loans in the form of mortgage assets. If borrowing is carried out by way of mortgage assets, the lender will automatically enjoy the same equity in proportion. The legal significance of the negative guarantee is to restrict the borrower's activities of using the asset as collateral for additional lending, so as to avoid weakening the borrower's ability to repay and thereby make the lender's right to demand repayment of the loan no less than any other secured interest Rights of creditors. Therefore, in the negotiation of the loan agreement, the lender strives to set out the clause in the agreement, and the stricter the better; the borrower is afraid that this clause may cause certain restrictions on its future operations and try to get rid of it. ^[1]

Negative guarantee clause

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The negative guarantee clause is an important clause commonly found in various types of international loan agreements. The basic contents are as follows: During the loan period, the borrower shall not arrange new loans in the form of mortgage assets. If borrowing is carried out by way of mortgage assets, the lender will automatically enjoy the same equity in proportion. The legal significance of the negative guarantee is to restrict the borrower's activities of using the asset as collateral for additional lending, so as to avoid weakening the borrower's ability to repay and thereby make the lender's right to demand repayment of the loan no less than any other secured interest Rights of creditors. Therefore, in the negotiation of the loan agreement, the lender strives to set out the clause in the agreement, and the stricter the better; the borrower is afraid that this clause may cause certain restrictions on its future operations and try to get rid of it. ^[1]

So far, there is not a universally accepted standard format of negative guarantee clauses among countries in the world. The wording is different, and the specific provisions are more flexible. For borrowers, some are strict and some are more favorable. A generally accepted provision states: During the period when the debt is not paid, the borrower will not use its real property or income to establish any form of mortgage, pledge or guarantee for foreign debt (except for pledge rights required by law and for the purchase of property) Except for security rights), unless the creditor also enjoys equal mortgage and security rights equally and proportionally. Most international commercial banks pay attention to various restrictions on negative guarantee clauses when carrying out lending activities, and treat different situations such as bonds and syndicated loans separately to avoid restrictions on their daily business operations.