Would Collective Action Clauses Raise Borrowing Costs?

Barry Eichengreen and Ashoka Mody

No 7458, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: F0 F3 (search for similar items in EconPapers)
Date: 2000-01
New Economics Papers: this item is included in nep-cfn and nep-pub
Note: IFM
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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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Working Paper: Would Collective Action Clauses Raise Borrowing Costs? (1999)
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