I am a layperson trying to better understand negative pledge covenants.
- Is following a correct example of a negative pledge covenant? John borrows $500 from Jane. Jane makes John sign a contact stipulating a negative pledge covenant such that he cannot borrow more and dilute Jane's money. For example, suppose John buys an iPhone with Jane's money. Puts that iPhone as collateral at a pawn shop and borrow $250. This would violate such covenant. If the covenant is violated, Jane can accelerate the debt.
Is it true that secured debt has absolute priority? In the above example, if John cannot meet the debt obligation to the pawn shop, the pawn shop can accelerate debt "ahead of" Jane and seize the principal plus interest. So, it is possible Jane is left with nothing to reclaim?
If the answer to #2 is true or partially true, why do people, corporations, and governments still put negative pledge covenants in debt contracts? Is this just a convention or stylized mechanism?