Would Collective Action Clauses Raise Borrowing Costs?
AbstractWe 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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7458.
Date of creation: Jan 2000
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- Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers 2343, C.E.P.R. Discussion Papers.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-01-11 (All new papers)
- NEP-CFN-2000-01-11 (Corporate Finance)
- NEP-PUB-2000-01-11 (Public Finance)
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- Eichengreen, Barry & Mody, Ashoka, 2000.
"Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans,"
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Elsevier, vol. 63(1), pages 5-44, October.
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