Negative Pledge and Multilateral Lending
ABA Spring Meetings 2009
Solange M. Martin
Counsel
BASIC CLAUSE STRUCTURE
A typical negative pledge clause reads as follows:
• The borrower will not create or permit to exist any security on its
property, revenues or other assets, present or future, or those of
its subsidiaries.
A variation to this basic structure often contains a carve-out to
capture a situation in which:
• The obligations of the borrower under the loan are equally and
ratably secured with the obligations of the borrower with respect
to other secured indebtedness.
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RELEVANCE
• Project Financing
• Trade Financing
• Corporate Laws
PURPOSE
• preserve the pari passu payment assumption made at the
time of assessment of the financing
• avoid future subordination in payments arising from the
borrower raising future secured financing
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MAIN ELEMENTS OF THE CLAUSE
• Types of security or quasi-security arrangements covered by the
restriction – tension between lender’s interest in broad coverage and
Borrower’s ordinary course of business
• Entities covered by the contractual restriction
ISSUE: STRUCTURAL SUBORDINATION
RELEVANCE: CORPORATE LOANS TO HOLDING COMPANIES
• EXCLUSIONS: governmental charges, trade activities, asset acquisition,
after-acquired subsidiaries.
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EFFECT
Contractual Undertaking
• Default : Contractual remedies :
• May a lender prevent a borrower or its subsidiaries from
granting security in breach of a negative pledge?
REQUESTS FOR PRELIMINARY INJUNCTION
• Grupo Mexicano de Desarrollo, S.A., v. Alliance Bond Fund, Inc.,
527 U.S. 308 (1999): DENIED
• AIG Insurance Company v. The Robert Plan Corporation, 851
N.Y.S.2d 56, 2007 N.Y. Misc. LEXIS 6579: DENIED
• Greylock Global Opportunity Master Fund v. Province of Mendoza,
2005 U.S. Dist. Lexis 1742, aff’d, 2006 U.S. App. LEXIS 1501 (2d Cir.,
Jan. 18, 2006): DENIED
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MULTILATERAL FINANCING
• Developmental Financing
• Map of institutions providing developmental financing
• IFC / MISSION
Promote sustainable private sector investment in
developing countries, thereby helping to reduce poverty
and improve people’s lives
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IFC’S INVESTMENTS
• Investments in private sector in emerging markets
• Diverse types of industries/sectors
• Diverse types of investment products
 loans
 equity and quasi-equity
 risk management products
• IFC conducts its investment activities based on international
market practices and conditions (i.e. market rates and
without any government guarantees)
• Developmental Impact
• IFC’s policies on environmental and social standards
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IFC’S FUNDING
• IFC funds its investment activities mainly by
 Placing long-term debt securities in international financial markets
 Making investments in private entities located in members’countries
• IFC mobilizes resources from international commercial
lenders into projects in which IFC invests .
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IFC’S B LENDERS PROGRAM
• Purpose
• Structure
 IFC as lender of record
 B lenders have recourse to IFC only under the Participation Agreement
• Rationale for B lenders:
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IFC’s knowledge and experience in investing in emerging markets
IFC’s Aaa-rating (by Moody’s)
Privileges and immunities
Preferred creditor status.
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