The World Bank Development Prospects Group

Himmat Kalsi provided the updated data on bond spreads and guidance on their interpretation. Anindita Sen and Galina Hale helped us to assemble the data and develop the documentation. For helpful comments and advice we thank Daniel Bond, Michael Buchanan, David Card, Thomas Duvall, Giovanni Ferri and the participants in a seminar at the IMF. We examine the implications for borrowing costs of including collective-action clauses in loan contracts. For a sample of some 2,000 international bonds, we compare the spreads on bonds subject to UK governing law, which typically include collective-action clauses, with spreads on bonds subject to US law, which do not. Contrary to the assertions of some market participants, we find that collective-action clauses in fact reduce the cost of borrowing for more credit-worthy issuers, who appear to benefit from the ability to avail themselves of an orderly restructuring process. In contrast, less credit-worthy issuers pay, if anything, higher spreads. We conjecture that for less credit-worthy borrowers the advantages of orderly restructuring are offset by the moral hazard and default risk associated with the presence of renegotiation-friendly loan provisions