Bond Exchange Offers or Collective Action Clauses?
39 Pages Posted: 17 Jun 2019 Last revised: 14 Apr 2020
Date Written: December 5, 2019
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
JEL Classification: G12, G32, G33
Suggested Citation: Suggested Citation