The International Capital Market Association (ICMA) has published an explanatory note which aims to provide a brief, “non-legal” explanation of the term “senior” and the “negative pledge” covenant, as they are currently used in the terms and conditions of international corporate bond issues.
The note, drafted in consultation with the Association of British Insurers (ABI), is intended to provide clarification on the use of these terms and highlight the most common misconceptions about their meaning.
ICMA, which represents the major banks active in the primary market for international corporate bonds, has been an active participant in recent discussions between the sell-side and investors focusing on the timeliness and accuracy of disclosure and clarity of covenants which appear in bond documentation.
The explanatory note addresses concerns raised by some institutional investors about the interpretation of some terms and covenants used in the documentation of bond issues, in particular the term “senior” and the “negative pledge” covenant.
It explains that the term “senior” is used to describe ranking of a debt in relation to other debts of the same issuer, but that it has no fixed legal meaning. The issuers normally use the term to denote “ordinary” debt that is not preferred or subordinated to other debts of the issuer. The explanatory note highlights the most frequent misconceptions about the term, for example that it might incorrectly be interpreted to mean that debt is secured or in any other way preferred in the insolvency of the issuer.