Negative Pledge Covenants in Pharmaceutical Credit Agreements

Disclaimer: This article is for informational purposes only and does not constitute legal, financial, or investment advice. The author is not a lawyer or financial adviser. All information is derived from publicly available sources and may not be complete or current. Details regarding transactions, royalty structures, and financial arrangements may change. Readers should conduct their own due diligence and consult with appropriate legal and financial professionals before making any decisions.

In the world of pharmaceutical finance, negative pledge covenants are a common yet often underappreciated feature of loan agreements and bond indentures. These covenants prohibit a borrower from creating any future security interests (liens, mortgages, or pledges) on its assets if doing so would prejudice existing lenders or bondholders. In simple terms, a negative pledge is the company's promise not to pledge its assets to new creditors without offering equivalent protection to current creditors.

This promise plays a crucial role in pharma financing, where intellectual property and other intangible "crown jewel" assets dominate balance sheets and where companies frequently raise capital on an unsecured basis.

Negative pledges maintain the pari passu (equal ranking) status of lenders by ensuring no later creditor can jump ahead with a secured claim on key assets. From a borrower's perspective, accepting a negative pledge can preserve flexibility and avoid the higher interest rates or operational constraints associated with secured debt.

For lenders, the negative pledge provides comfort that the borrower's assets will remain unencumbered (or that they will at least share in any collateral ratably) while their loan is outstanding. In the pharmaceutical industry—known for heavy R&D investment, patent-driven value, and volatile biotech funding cycles—negative pledge covenants have become particularly important as a tool to balance financing flexibility with creditor protection.

What is a Negative Pledge Covenant?

At its core, a negative pledge is a contractual promise by the borrower not to create or permit any lien or security interest on its assets that would rank senior to or pari passu with existing unsecured debt. In loan agreements, this typically appears as a "Restriction on Liens" clause, whereas in bond indentures it may be labeled a "negative pledge" or "limitation on liens" covenant. The goal is to protect existing lenders from becoming subordinated without their consent. If the borrower were to pledge assets to secure new debt, the negative pledge clause is breached, giving existing creditors legal recourse.

It's important to note what a negative pledge does not do: it does not create a security interest for the existing lender. Unlike a mortgage or charge, a negative pledge does not give the lender a lien on the asset – it is purely a promise by the company. Thus, if violated, the lender's remedy is typically to declare a default and sue for breach or accelerate the loan; the clause itself cannot magically void the new lien granted to the other creditor.

In effect, a negative pledge maintains the status quo (no secured claims ahead of the lender), but it cannot absolutely prevent the borrower from later encumbering assets – it only deters it by making such action an event of default.

To illustrate in financial terms, consider a company with $100 million in assets and a $50 million unsecured loan containing a negative pledge. As long as the covenant holds, the unsecured lender's claim is effectively supported by the full $100 million asset pool.

If the company attempted to raise another $30 million by pledging its lab equipment or patents to a new lender, the negative pledge would be violated. The original lender could then declare default and demand immediate repayment. Without the negative pledge, the new $30m secured lender would take first priority in those pledged assets, potentially leaving far less for the original lender in a liquidation scenario.

In essence, the negative pledge clause keeps the borrower's assets available for all creditors on an equal basis unless specific exceptions apply.

Typical Structure

Negative pledge covenants usually enumerate permitted liens – carve-outs that allow the borrower some flexibility to incur certain encumbrances. These often include minor liens arising by operation of law (e.g. tax liens or mechanics' liens), purchase-money security interests or equipment leases, and sometimes a general basket (capped amount of secured debt allowed).

For example, Teva Pharmaceutical's revolving credit agreement (2022) contains a classic negative pledge: "No Loan Party will … create or permit to subsist any Encumbrance over any of its assets," then proceeds to list permitted encumbrances such as tax liens, carriers' liens, and other ordinary-course charges.

Notably, Teva's covenant permits up to $2.0 billion in other secured financings and up to $2.5 billion in securitized receivables as exceptions, giving the large pharma some headroom for secured borrowing if needed. By contrast, a smaller biotech's negative pledge might allow far fewer exceptions or none beyond ordinary-course liens, reflecting tighter lender control.

In bond indentures, the language is similar: the issuer "undertakes not to create… any mortgage, charge, pledge, lien or other encumbrance upon any or all of its assets to secure any present or future indebtedness… without at the same time securing the [existing] notes equally and ratably".

This equal-and-ratable provision means if the company ever does put up collateral for new bonds or loans, the existing bondholders must be granted an equivalent security interest. Such clauses are common in investment-grade pharmaceutical company bonds, effectively assuring bondholders that they will not be left unsecured if the issuer later issues secured debt.

Enforcement Mechanics

If a negative pledge is breached, it triggers a default under the debt agreement, entitling the lender to accelerate repayment or take other remedies. Crucially, as mentioned, the lender cannot automatically seize the asset pledged to a third party just by virtue of the negative pledge.

The new secured lender's lien remains legally valid, leaving the original lender to seek damages or a court injunction. U.S. courts have generally treated negative pledge breaches as contract issues; a lender might win a judgment for breach, but if the company is insolvent or assets are fully pledged to someone else, that judgment could be cold comfort.

This is why negative pledge covenants are sometimes described as a relatively weak protection in a bankruptcy or distress scenario – they rely on the borrower's continued good behavior or the threat of default, rather than an actual security interest.

To mitigate this, sophisticated credit agreements often include what's colloquially termed a "double negative pledge." This means the borrower not only promises not to grant liens on certain assets, but also promises not to promise anyone else that it won't grant liens!

In other words, the company can't give another creditor a negative pledge on the same assets either. The rationale is to avoid a Catch-22 where the borrower's future agreement might forbid it from ever pledging assets to our lender. This double negative pledge ensures the current lender can later take collateral (for example, in a restructuring or amendment) without violating some other agreement's covenant.

We see this in practice: BioCryst Pharmaceuticals' 2023 credit facility specifies that no subsidiary may "enter into any agreement… prohibiting or limiting the ability to create… any Lien upon any Collateral in favor of the current lender". Such wording prohibits the borrower from granting a negative pledge to any other party, preserving the first lender's flexibility.

Finally, many negative pledge clauses are complemented by related covenants like limitations on sale-leaseback transactions or restrictions on subsidiary debt and distributions (to prevent circumventing the pledge via other means). These covenants work in tandem to protect the lender's position in the capital structure.

Importance in Pharma Finance

Negative pledges are especially significant in pharma and biotech finance for several reasons:

Intangible Assets (IP) as Key Collateral

Pharma companies, especially biotechs, derive most of their value from intangible assets – patents, drug formulations, licenses, and R&D knowledge. These are hard assets to collateralize (due to uncertain value and transfer restrictions), and lenders may be reluctant to force a sale of such assets in default.

Borrowers therefore often carve out intellectual property (IP) from the collateral package even in secured loans. Instead, the lender takes a negative pledge on the IP – the company agrees not to pledge or sell those crown jewel patents to anyone else.

This arrangement gives the lender some comfort that the IP can't be used to raise junior secured debt elsewhere, while the borrower keeps its intellectual property unencumbered. For the company, shielding critical drug IP via a negative pledge is preferable to putting it directly at risk of foreclosure. This is common in venture debt deals for biotech.

For instance, Liquidia Corporation, a clinical-stage biotech, entered a $10 million loan with Pacific Western Bank that excluded its patents from the collateral but subjected them to a negative pledge (prohibiting any liens or sale of the IP without the bank's consent). In Liquidia's case, all other assets were pledged, and the IP was effectively the "last resort" asset left unencumbered – the negative pledge ensured it stayed that way unless the lender later needed to step in.

Preserving Borrowing Capacity

Big pharmaceutical companies often have strong credit ratings and prefer raising unsecured debt (bonds or bank loans) to maintain operational flexibility. A negative pledge allows them to assure lenders that even though the debt is unsecured, the company won't suddenly issue secured bonds or loans that outrank existing obligations.

This assurance can translate into better credit terms (lower yields) because investors know they will remain on equal footing. For example, GlaxoSmithKline's financing arrangements explicitly include negative pledge clauses as standard, alongside other covenants, to maintain the unsecured nature of its debt.

Similarly, Roche's publicly disclosed debt policy notes that none of its bonds are secured by asset pledges – effectively a commitment to unsecured borrowing supported by negative pledge undertakings. In essence, the negative pledge is a promise that "what you see is what you get" in terms of credit risk: today's unsecured lender won't become tomorrow's subordinated lender.

Asset Partitioning and Licensing Deals

Pharma companies frequently enter collaborations, licensing, or JV agreements where IP and other assets are moved between entities. Negative pledge covenants can become important to ensure core assets aren't moved beyond the reach of creditors. They often work in tandem with covenants restricting transfers to ensure a company doesn't, say, shift valuable IP into an unrestricted subsidiary that then borrows against it.

Lenders will negotiate for provisions that any "material intellectual property" must reside in the obligated group (loan parties) or that negative pledge covenants apply to any subsidiaries holding such IP. This is particularly relevant in pharma, where one could otherwise try to silo a blockbuster patent in a subsidiary free of covenants. The negative pledge thus complements other covenants to keep the borrowing base intact.

Maintaining Unencumbered Asset Pools for Bondholders

Many large pharma firms have issued tens of billions in investment-grade bonds. Bond indentures typically have a negative pledge (often focused on principal operating assets like manufacturing facilities or major subsidiaries' stock). This protects bondholders by ensuring the company cannot, for example, secure all its lab facilities or trademarks under a new bank loan without equally securing the bonds.

The importance is heightened in pharma because tangible assets (plants, real estate) may be fewer relative to intangibles – bondholders are keen to ensure that whatever hard assets are available remain unpledged or shared. Merck & Co.'s and Amgen's notes, for instance, contain covenants restricting liens on certain significant assets, with exceptions for typical categories and modest amounts.

Such clauses maintain an "asset coverage" for the bondholders. While formulas are not usually explicit, the practical effect is to cap the amount of secured debt the company can incur (often by limiting it to a percentage of consolidated assets or through specified baskets). Ratings agencies and lenders closely watch these covenants, as a negative pledge indicates that unsecured creditors will not be diluted by hidden secured claims, thereby preserving credit quality.

Sector-Specific Financing Practices

In biotechnology venture lending, some lenders will only take a negative pledge over IP (instead of filing an actual patent security interest) due to enforceability concerns or the view that selling early-stage biotech IP is of limited use on default.

They weigh that the reputational/relationship cost of demanding a lien on, say, a pre-clinical compound might outweigh the benefit, especially if that IP's salvage value is questionable. Negative pledges thus become a way to strike a balance – the lender foregoes a lien on the most sensitive asset but gains a covenant that keeps others from taking that lien either. This dynamic is somewhat unique to sectors like biotech (or tech), whereas an equipment-heavy industry might simply collateralize the asset.

In summary, negative pledge covenants in pharma finance serve as a protective shield for lenders and as a flexibility tool for borrowers. They ensure that critical assets (labs, IP portfolios, product lines) remain available to satisfy all creditors equally, which is vital given the boom-bust nature of drug development and the high risk of capital intensive projects.

At the same time, they allow pharma companies to leverage their valuable IP implicitly (by promising not to encumber it elsewhere) rather than explicitly (by actually encumbering it). This implicit leverage can facilitate additional financing like royalty monetizations or unsecured revolving credit facilities that rely on the fact that core assets are unpledged.

Structure and Enforcement Across Jurisdictions

Negative pledge covenants are ubiquitous globally, but their legal footing and typical formulations differ by jurisdiction. Here we compare how they are structured and enforced in the U.S., U.K./Europe, and other markets:

United States

In U.S. corporate finance (usually New York law-governed agreements), a negative pledge is purely a contractual covenant. There is no mechanism under the Uniform Commercial Code (UCC) to perfect a negative pledge as a security interest. This means if the covenant is breached, the borrower is in contractual default, but a subsequent lender who took a lien still has that lien. The negative pledge lender's recourse is to sue or accelerate the loan, not to void the other lien.

U.S. courts have occasionally seen lenders attempt creative remedies – for instance, seeking injunctions to stop a borrower from granting collateral to someone else. However, such cases are rare and generally, the law does not grant a negative pledgee any direct property right in the collateral.

Furthermore, in bankruptcy, the negative pledgee is in a weak position: a debtor can often obtain court approval to prime a negative pledge with a DIP (debtor-in-possession) loan if needed. U.S. bankruptcy courts prioritize saving the business and maximizing creditor recoveries, so if new secured financing on formerly unrestricted assets is the only way to keep the company afloat, the court can authorize it despite a negative pledge.

The negative pledge lender may protest, but without a perfected lien, they usually aren't entitled to "adequate protection" (i.e. specific protections against collateral diminution) under the Bankruptcy Code.

Because of this, U.S. lenders view negative pledges as a line of defense but not a guarantee. The covenant's real power is ex ante – it deters management from taking actions that would trip a default. Ex post (after default), its power is limited.

That's why, as discussed, U.S. venture lenders often insist on additional safeguards around negative pledges: e.g. the "double negative pledge" (preventing the company from agreeing to any other negative pledge that could block future collateral grants), and careful crafting of related covenants so the borrower cannot transfer assets to an unrestricted subsidiary and use them as collateral elsewhere.

In documentation, a U.S. negative pledge clause usually applies to "any property or assets" of the borrower and its subsidiaries, but then carves out Permitted Liens. A typical U.S. clause might read: "The borrower shall not, nor shall it permit any subsidiary to, create, incur, or permit to exist any Lien on any of its assets, now owned or hereafter acquired, except Permitted Liens."

Permitted Liens are then defined (tax liens, purchase-money liens, specified secured debt baskets, etc.). This broad approach is evident in Teva's U.S.-style credit agreement: it flatly forbids any encumbrance on assets or any financing arrangement tantamount to secured debt, with a list of permissible exceptions.

The enforcement of this in the U.S. is through the event of default clause – upon breach, lenders can accelerate loans or refuse further lending. Cross-default provisions in other debt (like bonds) often mean a breach of a bank negative pledge could trigger defaults elsewhere, raising the stakes.

One nuance in the U.S.: because negative pledge breaches yield only unsecured claims, lenders sometimes try to indirectly enhance enforcement by stipulating that any judgment for a breach would be an "Obligation" under the loan. This way, if they later do get collateral (or if they already have collateral for other obligations), that judgment could be covered. Such fine-tuning aside, the U.S. regime treats negative pledges as a signal of the borrower's covenant compliance and a basis for default, but not a property right.

United Kingdom and Commonwealth

In the U.K., negative pledge clauses likewise appear in most corporate debt documents (often called "negative pledge" in Eurobond terms or simply included in loan covenants). English law, similar to U.S., does not give an ordinary negative pledge automatic priority or erasure of a subsequent lien. However, there are some interesting enforcement wrinkles and market practices in the U.K./Europe:

Floating Charge Priority

Under English law, a floating charge can cover all assets of a company but normally ranks behind later fixed charges on those assets (if those fixed charges are created before the floating charge "crystallizes"). To protect floating charge holders, it became common to include a negative pledge in the floating charge debenture, stating the company shall not create any new security ranking ahead of the charge.

If this negative pledge is registered at Companies House, a subsequent lender taking a fixed charge is deemed to have notice of it. While the later fixed charge isn't void, the prior floating charge with a registered negative pledge may claim priority or prevent the later creditor from asserting they lacked notice.

In practice, this means an English floating charge with a negative pledge can fend off some competing claims in insolvency – a feature not available under U.S. law. Singapore law (influenced by English law) explicitly notes negative pledge clauses restrict a chargor's right to create subsequent charges ranking ahead of a floating charge.

Thus, in jurisdictions with the floating charge concept (UK, many Commonwealth countries), registering a negative pledge clause can give it a quasi-security effect against third parties. Lenders in UK deals will ensure the negative pledge is properly registered as part of any floating charge debenture to preserve this priority shield.

Implied Duties and Good Faith

Recent English case law has shed light on the exercise of negative pledge rights. In Macdonald Hotels Ltd. v. Bank of Scotland plc [2025] EWHC 32 (Comm), the High Court considered a scenario where a borrower asked consent to grant security to a new lender on an asset already covered by an existing lender's negative pledge.

The bank refused, and the borrower alleged the bank was obliged to act reasonably or in good faith in exercising that discretion. The court did not find an implied term of full-on good faith, but it did hold that a lender cannot enforce a negative pledge for wholly arbitrary or irrelevant reasons.

The decision essentially said: a lender's refusal to waive or permit a second charge must be based on a legitimate commercial interest, and the lender should act in good faith when deciding. If the borrower's additional charge posed no threat to the original lender's security (for example, if there was abundant collateral value or the new lien was very limited), a flat refusal might be deemed unreasonable.

The court confirmed that a lender is entitled to prioritize its own security and financial health, but it should do so consistently and fairly. In Macdonald, the bank's enforcement of the negative pledge was ultimately found to be unjustified under those particular facts, so the borrower prevailed in getting relief.

This case highlights that under English law, the exercise of a negative pledge (especially where the covenant requires lender consent for exceptions) may be subject to an overlay of reasonableness and good faith. Banks are now advised to document their decision-making and have clear policies on when they grant or refuse consent to avoid being seen as capricious.

This is a notable contrast to the U.S., where lenders generally have wide latitude to enforce covenants strictly (subject only to the limited "good faith and fair dealing" doctrine, which rarely overrides explicit contract terms).

Eurobond Market Practice

In European bond markets (which often use English law), negative pledge clauses tend to be narrowly focused on capital markets indebtedness. For example, a typical Eurobond negative pledge might only restrict the creation of liens to secure other bonds or similar debt instruments, with exclusions for banking transactions.

The idea is to prevent a company from later issuing secured bonds that would dilute existing unsecured bondholders. There may be permitted security for a certain small amount or for certain project financings, but generally investment-grade European pharma issuers agree not to secure any capital markets debt without securing the existing notes equally and ratably.

This was historically important in euro markets as an assurance to bondholders (especially when many European companies were government-linked and could be tempted to secure bank loans preferentially). For example, Sanofi or Novartis in their Euro Medium Term Note programs include negative pledge clauses saying no mortgage or charge on "present or future assets" will be created to secure any bonds or similar debt without securing the Notes equally and ratably (with standard exceptions for things like liens arising by law or counterparty collateral in derivatives).

These clauses ensure a level playing field among bondholders and other public debt. Violation typically triggers an event of default on the bonds (sometimes only if the amount is material and not cured).

Civil Law Jurisdictions

In many EU countries with civil law systems (Germany, France, etc.), negative pledges are recognized contractually similarly. German law, for instance, doesn't give a negative pledge any registrable status (aside from the English floating charge scenario via choice of law). It is a promise often included in Schuldscheine (German private bonds) and syndicated loans.

Enforcement is by either vertragliches Unterlassungsanspruch (contractual claim to cease-and-desist) or damages. Some civil law courts might allow an injunction to prevent the action ex ante if a negative pledge breach is imminent, but if a mortgage or pledge is already granted to a third party in good faith, the original lender usually can't undo it. Hence, practically, the effect is similar: it's a covenant breach leading to default rights.

Summing up, in the U.K. and Europe, negative pledges carry significant weight in documentation and are almost universally present in unsecured corporate financings, but the legal teeth of the covenant vary. The U.K. adds a layer of potential equitable oversight (good faith in enforcement), and through the floating charge device can imbue negative pledges with something approaching a property right (for priority ordering). Europe uses them as a standard investor protection in bonds and loans, often with carefully negotiated exceptions.

Other Global Markets

Many emerging market loan agreements (often governed by English or New York law) also include negative pledges for the same reasons. For instance, an Indian pharma company borrowing from a foreign fund may covenant not to encumber assets, even though Indian law would treat that covenant as contractual.

One consideration is that in some countries, enforcement of unsecured claims can be challenging, so lenders place even more emphasis on keeping assets unencumbered via negative pledge. However, local law quirks exist. In China, for example, state-owned enterprises often cannot easily give blanket security over assets, so bonds and loans rely on negative pledges and keep debt unsecured (with government backstops).

The concept of a negative pledge clause is known and used in Asian cross-border financings, though local enforcement may require translating it into local security concepts (e.g. listing it in a debenture in India or Hong Kong, similar to the English practice).

One notable point in some Asia-Pacific deals is the distinction between a "possessory pledge" and other security – for instance, Hong Kong law only recognizes a "pledge" as something you physically hand over (not applicable to IP). Thus, documents might clarify that the negative pledge extends to any mortgage, charge, etc., ensuring all local forms of security are covered in the prohibition.

In summary, across jurisdictions the negative pledge's role is consistently to protect the unsecured creditor's position. The strength of that protection, however, depends on local law: U.S. and most countries treat it as a contractual shield (with breach = default), the U.K. gives it some sharper teeth via floating charge practice and an implied duty of good faith, and international bond markets incorporate it as a staple covenant to uphold market confidence.

Regardless of jurisdiction, a borrower that violates a negative pledge will face serious consequences, from acceleration of debt to reputational damage, which is usually enough to keep companies in line.

Comparison Table: Negative Pledge Enforcement by Jurisdiction

Small Biotechs vs. Large Pharma: Different Approaches

The application of negative pledge covenants can vary widely depending on the size and bargaining power of the company, as well as the composition of its assets. Here we contrast small biotech companies with large multinational pharma firms in how negative pledges are used and negotiated.

Small Biotech Companies and Venture-Stage Pharmas

Smaller biotech firms (often pre-revenue or early revenue companies) typically have fewer hard assets and rely heavily on a few key IP assets or development programs. When these companies seek debt financing – often in the form of venture loans or royalty-backed loans – lenders will want as much security as possible, but taking a lien on the biotech's core intellectual property can be problematic.

Reasons include: the difficulty of valuing or selling early-stage IP, the company's resistance to put its lifesaving patent at direct risk, or existing licenses that prohibit pledging the IP.

As a result, negative pledges are commonly employed as a substitute for actual collateral on IP. The lender may take a blanket lien on all assets except the IP, and in lieu of a lien on IP, the company gives a negative pledge (not to sell or encumber the IP without consent).

This was exactly the case with Liquidia Corp.: PWB's loan to Liquidia was secured by all assets except the company's drug IP, but that IP was locked up via negative pledge. The agreement even stated that the IP could not be sold without the bank's permission, effectively treating a sale as akin to creating a lien.

Thus, the negative pledge in small biotech deals often extends to outright dispositions of the IP, ensuring the borrower doesn't monetize the asset elsewhere to the detriment of the lender.

From the small company's perspective, this provides breathing room: they retain ownership and control of the IP for operations and potential partnerships, while giving the lender comfort that it won't be used to raise another loan. It's a trade-off driven by bargaining power.

A tiny biotech with one pipeline asset has little leverage to negotiate – the lender might demand not only a negative pledge on IP but also covenants to maintain a minimum cash balance, budgets, etc. In these cases, the negative pledge can be quite restrictive. It may come with zero or minimal "permitted liens" on any assets (maybe a small basket for equipment financing or liens in the ordinary course).

Essentially, the lender says: "We're lending primarily against your enterprise value and IP, even if we don't have a lien on the IP. So you must keep the assets unencumbered and available to us if things go south." Breaching that would likely trigger an immediate default.

Indeed, BioCryst's 2022 loan agreement with Pharmakon Advisors (a pharma-specialty lender) included a covenant that the company shall not incur any liens on its collateral or agree to any negative pledge in favor of others. The only exceptions were "Permitted Liens" which in a deal like that are narrowly defined (such as liens for taxes not yet due, or inchoate materialmen's liens, etc.). There was no general allowance for additional secured debt – a sign of the lender's tight control.

Small companies also face higher scrutiny on negative pledge compliance. If a covenant is tripped, they often must seek a waiver. For example, if a biotech inadvertently grants a small lien (perhaps a lab equipment lease that turned out to be a secured lease), it would need to get consent or a waiver to avoid default.

Liquidia admitted in filings that it had "in the past, breached multiple covenants" in its loan, including likely some related to cash levels or other restrictions, and had to obtain waivers to continue. Any violation of a negative pledge by a small company would send a red flag to all investors – it suggests either desperation (raising money on the sly) or mismanagement.

Small biotechs sometimes try to negotiate some flexibility – for instance, the ability to enter royalty financing arrangements or collaboration agreements that could be seen as an encumbrance on IP. Lenders may permit this if the counterparty is a strategic partner and the deal is more like equity than debt (for example, selling a percentage of future royalties on a drug is technically giving a security interest in that revenue stream).

In such cases, the negative pledge clause might carve out "Permitted Royalty Transactions" or allow liens subordinated to the lender's interest. BioCryst's deal, for instance, had to accommodate an existing royalty monetization; the negative pledge was tailored not to interfere with Royalty Pharma's and OMERS' interest in certain drug royalties (those were carved out in permitted liens).

This illustrates that for small firms, negative pledge covenants must sometimes be bespoke, reflecting the company's unique financing mix (convertible notes, royalty deals, venture debt all interplaying). Lenders will negotiate intercreditor agreements if multiple parties have a stake, but absent that, the negative pledge is the linchpin preventing rogue behavior.

In summary, for small biotechs, a negative pledge covenant is often stringently enforced and highly restrictive, given the limited asset base. It substitutes for collateral on the most valuable assets and is coupled with low tolerance for exceptions. The company's low bargaining power means lenders can insist on such covenants, and the cost of violation (immediate default, loan acceleration) is too high to risk.

The language may explicitly mention intellectual property by name, underscoring its importance. From the borrower's view this is still preferable to outright lien on the IP, and lenders accept it because foreclosing on early-stage IP might anyway yield scant recovery – the negative pledge at least prevents other creditors from meddling with that IP.

Large Multinational Pharma Companies

Large pharma companies (think Pfizer, Johnson & Johnson, Novartis, AstraZeneca, etc.) typically have robust cash flows, diverse asset portfolios (including real estate, equipment, subsidiaries worldwide), and strong credit ratings. They can often borrow huge sums on an unsecured basis. Negative pledge covenants still appear in their debt documentation, but the context and flexibility are different:

Bargaining Power and Flexibility

Large pharmas have the clout to negotiate looser covenants or even avoid certain covenants altogether, especially if they are investment-grade. Many investment-grade revolving credit facilities for pharma include a negative pledge, but with broad carve-outs.

For example, a $5 billion credit line might permit, say, up to 5% of the company's consolidated assets to be pledged for other debt, or allow specific secured financings like securitization of receivables, finance leases, or bank loans by foreign subsidiaries that do not materially affect the parent.

The earlier Teva example illustrates this: Teva's 2022 $1.8 billion syndicated revolving credit facility (an unsecured, sustainability-linked RCF) contains a negative pledge with a long list of exceptions. These include standard exclusions (liens for taxes, deposits to secure bids, judgment liens, etc.) and notable large baskets: up to $2.0 billion in other secured debt and $2.5 billion in securitized receivables are permitted.

For a company Teva's size, that gave it meaningful flexibility (several billion dollars of secured borrowing capacity) without breaching the covenant. Such baskets are often calibrated to the company's size – e.g., 10% of total assets or a fixed dollar amount. Large companies can argue for these allowances by pointing out operational needs: they might occasionally want to do secured local financing for a new manufacturing plant, or engage in factoring of receivables for working capital, etc., without tripping a default.

Capital Markets vs. Bank Debt

Big pharmas also issue bonds regularly. Bond negative pledge clauses (if present in the indentures) are usually simpler but cover a lot of ground. For instance, Merck & Co. historically had an indenture covenant that it would not permit liens on "Principal Domestic Manufacturing Plants" or the stock of certain subsidiaries to secure debt, with exceptions for purchase-money liens and a basket (often around a small percentage of tangible assets).

If it needed to exceed that, it would have to secure the bonds equally. This kind of formulation protects bondholders while giving management some maneuvering room for ordinary course financing. Large pharmas are very mindful of their credit ratings, so they generally avoid piling on secured debt anyway.

The negative pledge in their bond indentures is as much a signal to investors as it is a binding restriction. Ratings agencies treat the presence of a negative pledge covenant as a positive governance feature – it means the issuer cannot easily add secured debt (which would worsen recovery for existing debt) beyond a modest level.

Enforcement and Occurrence

It is actually uncommon for large, investment-grade pharma companies to violate negative pledge covenants – they manage their balance sheets to avoid that scenario. If anything, these covenants are most tested in M&A situations or spinoffs.

For example, when a pharma company spins off a division, existing debt covenants (including NPs) have to be considered to ensure the spinco doesn't take assets that leave the remaining company too asset-light (affecting the covenant calculations). In one notable case, Warner Chilcott (which acquired parts of Allergan) had bond covenants limiting liens, which became a discussion point during corporate restructuring.

Typically, companies either refinance the debt (thus eliminating the old covenants) or seek consent if they anticipate needing to encumber assets in a way that might breach the negative pledge.

Global Operations – Local Debt

Large multinationals might have dozens of subsidiaries that occasionally borrow locally (perhaps a local working capital facility secured by local inventory, etc.). Negative pledge covenants in the parent's agreements usually permit subsidiary secured debt up to a limit or in certain categories.

For instance, a covenant might say the restriction on liens does not apply to "liens on assets of subsidiaries that secure indebtedness of those subsidiaries, provided the aggregate amount is below X." This recognizes that in some countries, lenders require security and the amounts are not significant to the whole group. Large pharmas negotiate these nuances. As a result, their negative pledge clauses tend to be long and detailed, covering myriad exceptions – quite the opposite of a startup biotech's terse "no liens, period" covenant.

Case Example – Pfizer

Pfizer's credit agreements (as can be gleaned from SEC filings) include negative pledge clauses but allow certain encumbrances. Pfizer's $5 billion revolving facility in recent years included a covenant restricting secured debt, but Pfizer, being highly rated, likely had generous allowances or even the ability to incur some secured debt if its consolidated net tangible assets threshold wasn't breached.

In a 20-F filing around the time of the Pfizer–Allergan attempted merger, it was noted that Pfizer's credit facilities contained negative pledge and pari passu ranking covenants, indicating they could not prefer other creditors with collateral.

Yet Pfizer also historically utilized trade finance and other secured arrangements on a small scale, which would have been permitted by baskets. The key is that these covenants are crafted not to be a straitjacket for a large company's normal operations; they are aimed at preventing extraordinary actions (like pledging a large chunk of assets for a new loan or subsidiary issuance that would hurt existing creditors).

Re-pricing Risk

Large firms also care about negative pledges because a breach or potential breach can spook the bond market or trigger rating reviews. If a big pharma ever had to mortgage its assets (say, in distress), bondholders would see that as a major adverse event.

Thus, even the existence of a negative pledge covenant can act as a discipline mechanism: management knows that raising secured debt beyond a bit of wiggle room is off-limits without causing covenant trouble. This preserves the credit profile. In this sense, negative pledges function as a form of "pre-commitment" by large companies to maintain a mostly unsecured capital structure.

To sum up, large pharma companies use negative pledge covenants as a lightweight constraint – a promise to maintain their generally unsecured, high-grade credit practice – whereas small biotechs use them as a heavy constraint, often because the lender mandates it in lieu of full collateral. Large firms have the leverage to insert carve-outs and manage the covenant, and often their business model doesn't require pushing its limits. Small firms live under the shadow of the covenant daily, knowing a single misstep could default them.

Comparison Table: Small Biotech vs. Large Pharma Negative Pledges

Recent Examples and Language from Agreements

To give a flavor of the legal language and how negative pledge covenants are articulated, here are a few excerpts from recent pharmaceutical credit agreements and disclosures:

Teva Pharmaceutical (April 2022 Credit Agreement)

Section 6.03 of this unsecured revolving credit facility is titled "Negative Pledge" and reads in part: "No Loan Party will… create or permit to subsist any Encumbrance over all or any of its present or future revenues or assets… except for the following 'Permitted Encumbrances'…" followed by sub-clauses (a) through (r) listing exceptions.

Sub-clause (p) allows "Encumbrances securing obligations… provided that the aggregate amount… shall not exceed US$2,000,000,000 at any time", and sub-clause (r) similarly allows up to $2.5 billion of receivables securitization liens. This explicit inclusion of large dollar baskets in the contract shows how Teva built flexibility into the negative pledge. Essentially, Teva can raise a couple billion in secured debt without defaulting, but no more.

BioCryst Pharmaceuticals (November 2022 Loan Agreement with Pharmakon)

In an SEC exhibit, Section 6.6 titled "No Further Negative Pledges; Negative Pledge" stipulates: "No Credit Party nor any of its Subsidiaries shall enter into any agreement… prohibiting or limiting the ability of such Credit Party or Subsidiary to create… any Lien upon any Collateral, whether now owned or hereafter acquired, in favor of the Collateral Agent… (other than Permitted Negative Pledges)."

This is the "double" negative pledge preventing the company from giving any similar covenant to another creditor. It's immediately followed by the actual negative pledge on assets, which in BioCryst's case is integrated with collateral provisions (since the loan had specific collateral, including equity of subsidiaries). In practical effect, BioCryst could not, for example, take on new debt that says "we won't pledge X asset to anyone" because that would violate this clause – a very lender-protective stance.

Liquidia Corporation (2018 Prospectus Risk Factor)

Liquidia's SEC filing spelled out in plain English the consequence of its negative pledge: "Our facility with PWB is collateralized by all of our assets excluding our intellectual property, on which we have granted a negative pledge. We have, in the past, breached multiple covenants in our loan and security agreement… but have obtained waivers… If we breach certain of our debt covenants… it may constitute an event of default… and the lenders could, among other things, foreclose on the collateral… which excludes our intellectual property."

This candid description highlights how the negative pledge on IP was central – even if the lender foreclosed on all other assets, the IP remained unpledged (thus couldn't be directly seized), but the covenant breach itself would be devastating (lenders could accelerate all debt, effectively bankrupting the company if not cured). The fact Liquidia had to mention the NP in its risk factors underscores its significance to that financing arrangement.

Innogy SE (Bond prospectus example, 2017)

As a non-pharma example of standard bond language (very similar to what many pharma issuers use), Innogy's bond terms state: "So long as any Note remains outstanding… the Issuer undertakes not to create or permit to subsist any mortgage, charge, pledge, lien or other encumbrance upon any or all of its present or future assets to secure any present or future Bond Issue without at the same time, or prior thereto, securing such Notes equally and rateably therewith."

This succinct clause encapsulates the essence of a negative pledge in bond markets. Pharma companies like GSK, AstraZeneca, or Novartis use nearly identical wording in their debt programs. The focus is on publicly traded debt ("Bond Issue") and the remedy is to secure the existing notes equally if any security is given to new notes.

There are usually a few carve-outs (e.g. for statutory liens or minor leasing), but the language above is the crux. It's worth noting how absolute it sounds – any asset, present or future, cannot be encumbered for new bonds unless the old bonds share in it. Breach of this typically leads to an event of default after a notice period, giving bondholders the right to accelerate repayment.

Jazz Pharmaceuticals (Credit Agreement Amendment, 2024)

A Jazz Pharma 8-K filing (July 2024) included an amendment referencing "Section 6.09 – Restrictions on Subsidiary Distributions and Negative Pledge Clauses. [The Company shall not] permit [the] Parent or any Subsidiary to enter into any agreement that imposes these restrictions…"

Although the full text isn't provided, the reference suggests Jazz's lenders wanted to ensure no upstream or downstream affiliate could agree to something that would violate the spirit of the negative pledge or restrict cash movement. In practice, mid-sized pharmas like Jazz, which undertake acquisitions and have complex structures, often have covenants combining negative pledge with limitations on subsidiary indebtedness and distributions (to prevent "leakage" of assets or value away from the creditors' reach).

This shows how negative pledge concepts can extend beyond just liens – in covenants, they appear alongside restrictions on subsidiary actions, all aimed at keeping the credit group's assets available.

These examples reinforce how the precise wording can vary, but the thrust is consistent: protect the lender/bondholder from losing asset backing to other creditors. Whether through a long laundry list of exceptions (in a big loan), or a terse sweeping statement (in a bond), negative pledges are a backbone of covenant packages in pharma finance.

Conclusion

Negative pledge covenants, while often tucked away in the fine print of credit agreements and bond indentures, play an outsized role in the financial strategy of pharmaceutical companies. They are the silent guardians of a pharma company's unencumbered asset base, assuring creditors that valuable assets – from manufacturing plants to molecule patents – won't be secretly pledged elsewhere. In an industry where intangible assets and future potential drive valuations, this assurance is vital.

For pharmaceutical borrowers, negative pledges offer a way to raise capital without handcuffing the business to secured debt. A young biotech can obtain much-needed cash while keeping its intellectual property formally unpledged, using the negative pledge as a promise to lenders and a signal to partners that its key IP remains under its control.

A large pharma can maintain a predominantly unsecured debt profile, preserving flexibility for corporate actions and avoiding the costs and complications of securitizing assets in each financing. The negative pledge thereby becomes a cornerstone of covenant-lite yet responsible borrowing: it doesn't burden day-to-day operations like a fixed charge might, but it disciplines extraordinary behaviors.

For lenders and investors, a negative pledge is an essential risk mitigant, especially when lending on an unsecured basis. It forces all creditors to play fairly – no one can grab collateral to jump the queue (absent an allowed basket or the original lender getting an equal piece).

As we've seen, enforcement is not foolproof, especially in distress or bankruptcy, but the presence of a negative pledge significantly shapes the borrower's choices long before bankruptcy is on the table. In the high-stakes world of pharma, where a single drug's success or failure can swing fortunes, creditors rely on covenants like negative pledges to ensure that if fortunes fade, the company's assets remain accessible for collective recovery rather than pledged away in a last-ditch scramble.

Across jurisdictions, the negative pledge has proven adaptable – from New York to London to continental Europe and beyond – adjusting to legal nuances while upholding the same financial principle. Recent developments like the U.K.'s Macdonald Hotels case remind us that even these covenants operate in a context of good faith and commercial reasonableness, at least under English law, tempering lenders' absolute discretion with a duty of consistency.

Nonetheless, negative pledges remain a lender's prerogative: a powerful negotiating chip that often indicates the balance of power in a deal. A heavily negotiated, narrow negative pledge (with many exceptions) suggests the borrower had leverage and strong fundamentals; an all-encompassing negative pledge with virtually no exceptions suggests the lender's word was law.

In the style of The Economist's Bartleby: one might say a negative pledge is a bit like a gentleman's agreement backed by legal force – a promise not to do something ungentlemanly (like favour another creditor with collateral), formalized in writing. It embodies a mix of trust and threat: trust that the borrower will abide by it, threat that if it doesn't, financial ruin could follow.

In pharma finance, where today's blockbuster can be tomorrow's off-patent loss, maintaining trust between borrowers and lenders is paramount. Negative pledge covenants, in their quiet way, help underwrite that trust by constraining rash moves and keeping all parties on equal footing regarding the company's assets.

As financial engineers in pharma continue to devise innovative funding structures – royalty monetizations, IP-backed loans, JV financings – the negative pledge will undoubtedly evolve, but it is unlikely to disappear. Its enduring presence in credit agreements and bond covenants attests to a fundamental reality: when lenders have little more than a promise to rely on, they will insist on promises about that promise.

A negative pledge is exactly that – a meta-promise in the complex dialogue between pharma companies hungry for capital and investors hungry for security. In the careful balance of risk and reward that defines pharmaceutical finance, negative pledges provide a semblance of equilibrium, ensuring that even when science pushes boundaries, financial covenants keep boundaries in place.