DP2343 Would Collective Action Clauses Raise Borrowing Costs?

Author(s): Barry Eichengreen, Ashoka Mody
Publication Date: December 1999
Keyword(s): Debt, IMF, Restructuring
JEL(s): F0, F30
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2343

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.