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
Date of revision:
Publication status: published as Eichengreen, Barry and Ashoka Mody. "Do Collective Action Clauses Raise Borrowing Costs?," Economic Journal, 2004, v114(495,Apr), 247-264.
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Other versions of this item:
- Eichengreen, Barry & Mody, Ashoka, 1999. "Would Collective Action Clauses Raise Borrowing Costs?," CEPR Discussion Papers, C.E.P.R. 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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- Barry Eichengreen & Ashoka Mody, 1999. "Lending Booms, Reserves, and the Sustainability of Short-Term Debt: Inferences from the Pricing of Syndicated Bank Loans," NBER Working Papers 7113, National Bureau of Economic Research, Inc.
- Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
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