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Bond Exchange Offers or Collective Action Clauses?

Ulrich Hege () and Pierre Mella-Barral

No 19-1016, TSE Working Papers from Toulouse School of Economics (TSE)

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)
JEL-codes: G12 G32 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm
Date: 2019-06
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