Bond Exchange Offers or Collective Action Clauses?

Résumé

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.

Mots-clés

Out-of-court Restructuring; Exchange Offer; Collective Action Clause; Exit Consent; Hold-out problem; Hold-in Problem; Trust Indenture Act.;

Codes JEL

G12: Asset Pricing • Trading Volume • Bond Interest Rates
G32: Financing Policy • Financial Risk and Risk Management • Capital and Ownership Structure • Value of Firms • Goodwill
G33: Bankruptcy • Liquidation