Working Paper: CEPR ID: DP2343
Authors: Barry Eichengreen; Ashoka Mody
Abstract: We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions.
Keywords: debt restructuring; IMF
JEL Codes: F00; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Borrower characteristics and market conditions (G21) | borrowing costs (H74) |
| Collective action clauses (D70) | borrowing costs for more creditworthy issuers (H74) |
| Collective action clauses (D70) | borrowing costs for less creditworthy issuers (H74) |
| Collective action clauses facilitate orderly restructuring (G33) | borrowing costs for more creditworthy issuers (H74) |