Definition - What does Negative Covenant mean?
A negative covenant is also known as a restrictive covenant.
Divestopedia explains Negative Covenant
The greater the number of negative covenants in a bond issue, the lower the interest rate is on the debt because restrictive covenants make bonds safer in the eyes of investors. Negative covenants protect the purchaser and prevent the seller from taking actions prior to closing that materially alter the firm that the purchaser expects to buy on closing. These include:
- Not changing accounting methods or practices
- Not incurring a liability in excess of a certain amount
- Not paying a dividend or other distributions to stockholders
- Not releasing or waiving rights
- Not amending or terminating contracts or leases