Bond Restructuring and Moral Hazard

Abstract

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.Collective action clauses;Moral hazard;Emerging markets;law, bonds, bond, bondholders, international bonds, bond yields, sovereign bonds, bond contracts, bond issue, eurobonds, bond ratings, emerging market bonds, corporate bonds, financial markets, yankee bonds, bond contract, global bonds, brady bonds, market bond, bond restructuring, international bond, bond issues, yields on bonds, sovereign bond, bearer bond, emerging market bond, bond market, financial market, financial institutions, rate bonds, outstanding bonds, foreign bonds, valuation of bonds, international financial markets, bond issuance, international bond issues, bond markets, cash flows, individual bond, international capital, convertible bonds, samurai bonds, international banks, international financial architecture, bond financing, foreign ? bonds, dollar bonds, financial law, international capital markets, eurobond, supply of bonds, financial stability, individual bondholders, international law, financial system, dual currency bonds, bond market access, international bond markets, fixed rate bonds, international finance, bond flows