Every ABL credit agreement contains a negative pledge: a covenant that the borrower will not create, incur, or permit any lien on its property except the liens the agreement expressly allows. The exceptions live in the definition of Permitted Liens, which in a typical middle-market ABL agreement runs anywhere from fifteen to thirty separate clauses. Most of them are boilerplate. A handful are not, and those are the ones that decide whether the borrower can finance a new truck fleet, sign a sale-leaseback, or put a mortgage on a warehouse without asking the agent first.
The negative pledge rarely gets attention at signing because most borrowers do not plan to grant new liens. It gets attention eighteen months later, when an operating need shows up and the finance team discovers that the basket it needs was sized for a smaller company. This piece walks through how the permitted liens schedule is built, which baskets matter most, how they tie to the rest of the agreement, and where the real negotiating room sits.
Why the negative pledge matters in an asset-based deal
In a cash-flow loan, the negative pledge protects the lender's recovery position in general terms. In an ABL facility, it does something more specific: it protects the priority of the collateral that supports the borrowing base. Receivables and inventory are only worth their advance rate if the agent holds a first-priority perfected lien on them. Any competing lien on those assets — a supplier's purchase-money claim on inventory, a tax lien, a judgment lien, a factor's interest in a carved-out pool of receivables — either reduces availability through a reserve or makes the asset ineligible outright.
That is why ABL lenders tend to be relaxed about liens on assets outside the borrowing base (equipment, real estate, certain intellectual property in some structures) and very tight about anything that touches current assets. A well-drafted permitted liens schedule reflects that split. A poorly drafted one treats all collateral the same way and either over-restricts the borrower or under-protects the lender.
How the permitted liens definition is typically organized
Although drafting varies by agent and law firm, the definition usually falls into four groups.
Liens in favor of the lenders
The first clause always permits liens securing the obligations under the loan documents themselves. In deals with a companion term loan or second-lien facility, the schedule also permits those liens, subject to the intercreditor agreement. Our intercreditor agreement guide covers how priority is split between the ABL and term lenders.
Liens that arise by operation of law
These are liens nobody negotiates for: statutory liens of landlords, carriers, warehousemen, mechanics, and materialmen; liens for taxes not yet due or being contested in good faith with adequate reserves; pledges and deposits for workers' compensation and unemployment insurance; and deposits to secure bids, leases, and performance bonds in the ordinary course. Lenders permit them because the business cannot operate without them, but most agreements condition them on the underlying obligation not being past due or on the borrower contesting it properly.
From a borrowing-base standpoint, several of these still matter. A landlord or warehouse lien on inventory is exactly why agents take rent and warehouse reserves when a collateral access agreement is not in place — see our landlord and bailee waiver guide. The lien is permitted; the availability impact is handled separately.
Existing liens
Liens in place at closing are permitted if they appear on a disclosure schedule, usually with the qualifier that they cannot be extended to additional property and that the underlying debt cannot be increased beyond the amount outstanding at closing (plus accrued interest and fees on any refinancing). The schedule is built from the UCC, tax, and judgment lien searches run during closing, which our ABL closing checklist walks through. Anything the search turns up that is not scheduled either gets terminated at closing or becomes a problem later.
Negotiated baskets
This is where the value is. The negotiated baskets permit liens the borrower expects to need going forward, and they are usually tied to a matching debt basket in the indebtedness covenant. The key ones are below.
The baskets that matter most
Purchase-money and capital lease liens
The most frequently used basket in a middle-market ABL agreement. It permits liens securing purchase-money debt and capital (finance) lease obligations, limited to the specific asset acquired and its proceeds, and capped at a dollar amount. The cap is the whole negotiation. A distributor that expects to replace its truck fleet, or a manufacturer planning a line upgrade, should size the cap against its actual capital expenditure plan rather than accepting a round number from the first draft.
Two drafting details deserve attention. First, the lien must typically attach within a set period after acquisition (often 90 to 180 days), so a borrower that pays cash for equipment and tries to finance it a year later may fall outside the basket. Second, the basket almost always excludes current assets. Purchase-money liens on inventory are a real risk to the borrowing base, and agents will not permit them without a specific carve-out and, usually, a reserve.
Liens on acquired assets
When the borrower buys a company or assets that come with existing secured debt, this basket allows the liens to survive, provided they were not created in contemplation of the acquisition and do not spread to other property. The practical question is whether the matching debt basket is large enough to leave the acquired debt in place for a transition period rather than forcing an immediate payoff at closing.
Real estate liens
In many ABL structures, real estate is either excluded collateral or included only in a companion term loan. If the borrower owns facilities it may want to mortgage or sell-and-lease-back later, the agreement needs a basket for mortgage liens on excluded real estate, or a clean exclusion that takes the property outside the negative pledge entirely. Without one, a sale-leaseback that makes obvious sense may require a consent request and an amendment fee.
The general basket
Nearly every agreement contains a general catch-all basket permitting other liens securing obligations up to a stated amount. In middle-market deals this is often set as a fixed dollar figure; in larger sponsor deals it may be the greater of a dollar amount and a percentage of total assets or EBITDA, so the basket grows with the business. Agents commonly restrict the general basket from attaching to ABL priority collateral.
Cash collateral for letters of credit, hedges, and cash management
Borrowers with commodity hedges, foreign exchange contracts, or letters of credit issued outside the facility may need to post cash collateral. A specific basket for cash deposits securing those obligations, sized to the actual exposure, prevents technical defaults when a counterparty asks for margin.
How liens interact with the rest of the agreement
The debt covenant
A lien basket is useless without matching debt capacity. The indebtedness covenant and the permitted liens definition are drafted in parallel, and a borrower should read them side by side. The common mistake is negotiating a larger purchase-money lien basket while leaving the purchase-money debt basket at the original cap.
The borrowing base
Even when a lien is permitted, it can still affect availability. Priority payables — certain taxes, wage claims, and some statutory claims that could prime the agent's lien in a liquidation — are handled through reserves rather than the negative pledge. Permitted does not mean free.
Events of default
An unpermitted lien is a covenant breach. Judgment liens above a threshold, or tax liens that are not being contested, may also trigger a separate event of default. Our events of default guide walks through how those triggers are drafted.
Where borrowers find negotiating room
Size the purchase-money basket to the real capital plan, with room for replacement cycles. Ask for a grower component on the general basket if the business is expected to scale. Carve owned real estate out of the negative pledge if there is any chance of a sale-leaseback. Confirm that acquired-debt liens can survive for a reasonable transition period. Make sure the tax-lien exception tracks how the borrower actually contests assessments. And read the lien and debt covenants together before signing, not after the need arises.
None of these requests is unusual. Agents expect them, and most are easier to win at the term-sheet stage than in an amendment. The cost of getting them later is usually a consent fee, legal expense, and time — see our guide to the amendment and waiver process.
Where DCE fits
Don Clarke — SFNet Hall of Fame 2021, Lifetime Achievement Award recipient, author of "Asset Based Lending Disciplines" (the first ABL textbook), and trainer of more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays — has spent decades on both sides of how lenders think about collateral priority. That perspective is what DCE brings to borrowers reviewing a term sheet or credit agreement: we advise on which covenant terms will matter to the business later, help borrowers prepare the capital plan that supports the baskets they need, and introduce borrowers to lenders whose structures fit. DCE does not lend, underwrite, fund, or approve credit; final decisions rest with the lender. Learn more about our advisory services and how the engagement works.
For lenders, DCE's sister firm ABLC (ablc.net) provides due diligence, field examination, and training services, including the lien-search and collateral-priority review that supports these covenants.
Reviewing an ABL term sheet?
If you are negotiating a new facility or planning capital spending under an existing one, the lien and debt baskets deserve a close read before they become a constraint. DCE helps borrowers understand how these covenants will affect the business.
Submit Your DealEducational only; not legal, tax, or investment advice. Covenant terms vary widely by lender, deal size, and structure. Borrowers should rely on qualified counsel for the review of any credit agreement.