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

_IMF Working Papers, August 1, 2001_

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## Bibliographic details
- Authors: Torbjorn I. Becker, Anthony J. Richards, Yunyong Thaicharoen
- Published: August 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451851595.001

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### 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.

### Research question and scope
- Core question: Do collective action clauses (CACs) increase borrowing costs by creating moral hazard?
- Data used: primary market yields and secondary market yields (as described in the summary).
- Issuer coverage: higher-rated and lower-rated issuers in emerging market contexts (as described in the summary).

### Key findings
- No evidence that the presence of collective action clauses increases yields for either higher- or lower-rated issuers.
- The perceived benefits from easier restructuring are at least as large as any costs from increased moral hazard.

### Policy implications and interpretation
- Wider use of collective action clauses by emerging market borrowers does not appear to raise bond yields, suggesting limited or no market penalty in terms of borrowing costs.
- Easier restructuring facilitated by CACs may deliver net benefits that offset concerns about moral hazard.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/bond-restructuring-and-moral-hazard-are-collective-action-clauses-costly-15178_