Would Collective Action Clauses Raise Borrowing Costs? / Barry Eichengreen, Ashoka Mody.

Format:

Book

Author/Creator:

Eichengreen, Barry.

Contributor:

National Bureau of Economic Research.

Mody, Ashoka.

Series:

Working Paper Series (National Bureau of Economic Research) no. w7458.

NBER working paper series no. w7458

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2000.

Summary:

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.

Notes:

Print version record

January 2000.