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Bond Exchange Offers or Collective Action Clauses?

Ulrich Hege () and Pierre Mella-Barral

Finance, 2019, vol. 40, issue 3, 77-119

Abstract: This paper examines two prominent approaches to design efficient mechanisms for debt renegotiation with dispersed bondholders: debt exchange offers that promise enhanced liquidation rights to a restricted number of tendering bondholders (favored under U.S. law), and collective action clauses that allow to alter core bond terms after a majority vote (favored under U.K. law). We use a dynamic contingent claims model with a debt overhang problem, where both hold-out and hold-in problems are present. We show that the former leads to a more efficient mitigation of the debt overhang problem than the latter. Dispersed debt is desirable, as exchange offers also achieve a larger and more efficient debt reduction relative to debt held by a single creditor.

Keywords: out-of-court restructuring; exchange offer; collective action clause; exit consent; hold-out problem; hold-in problem; trust Indenture act (search for similar items in EconPapers)
Date: 2019
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