Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?

By Torbjorn I. Becker, Anthony J. Richards, Yunyong Thaicharoen

August 1, 2001

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Format: Chicago

Torbjorn I. Becker, Anthony J. Richards, and Yunyong Thaicharoen. Bond Restructuring and Moral Hazard: Are Collective Action Clauses Costly?, (USA: International Monetary Fund, 2001) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Many official groups have endorsed the wider use by emerging market borrowers of contract clauses which allow for a qualified majority of bondholders to restructure repayment terms in the event of financial distress. Some have argued that such clauses will be associated with moral hazard and increased borrowing costs. This paper addresses this question empirically using primary and secondary market yields and finds no evidence that the presence of collective action clauses increases yields for either higher- or lower-rated issuers. By implication, the perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.

Subject: Bond yields, Bonds, Emerging and frontier financial markets, Financial institutions, Financial markets, Financial sector policy and analysis, International bonds, Moral hazard

Keywords: Bearer bond, Bond characteristic, Bond contract, Bond issue, Bond restructuring, Bond yields, Bonds, Collective action clauses, Contract design, Emerging and frontier financial markets, Emerging market, Emerging markets, Global, International bonds, Low-rated borrower, Moral hazard, Primary market yield data, Rate issue, Secondary market yield, WP, Yield difference, Yield premium

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/092
Stock No:

WPIEA0922001
ISBN:

9781451851595
ISSN:

1018-5941

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