With more borrowers and lenders entering into net asset value (“NAV”) credit facilities, lenders may want to consider including a double negative pledge within the covenant provisions of NAV credit facility documentation. In this Legal Update, we explain:

• What a double negative pledge is;
• How using a double negative pledge can protect a lender’s right to seek additional collateral, deter the borrower from granting other negative pledges, and protect the lender’s place as a senior creditor; and
• Why a lender should make sure to have adequate security interests in new collateral even if a double negative pledge is included.

Background

The market for NAV credit facilities continues to grow and evolve. With their increased use, fund finance lenders should be aware of a helpful covenant provision: double negative pledges.

A negative pledge, often included in traditional loan documentation, is a covenant that prohibits the borrower from pledging assets of the borrower to another party, whether or not such assets are pledged as collateral.

The following is an example of negative pledge language in a credit agreement:

No Borrower shall, directly or indirectly, create, incur, assume or suffer to exist any Lien (other than in connection with this Agreement) upon or with respect to any of the property or assets (including the Collateral) of any kind, real or personal, tangible or intangible (including, but not limited to, the capital stock or other equity interest, as the case may be) of such Borrower.

A double negative pledge is a covenant which goes further than the standard negative pledge by also including language requiring the borrower to abstain from granting any other negative pledges to third parties. In other words, the borrower agrees to refrain from (1) granting liens on assets pledged to such lender to any other existing or prospective lender...