Volume 25, Numbers 3 & 4 / September/December ,
Enhanced Collective Action Clauses and Sovereign Borrowing Costs
Multinational Finance Journal, 2021, vol. 25, no. 3/4, pp. 187–217
Kay Chung , International Monetary Fund    Corresponding Author
Michael G. Papaioannou , International Monetary Fund

Abstract:
This paper analyzes the effects of the inclusion of enhanced collective action clauses (CACs) in international (nondomestic law-governed) sovereign bonds on borrowing costs, using secondary-market bond yield spreads, during September 2014 to March 2021. Our findings indicate that in the period September 2014 to February 2020, where no restructuring episodes have occurred, enhanced CACs are negatively associated with sovereign bond yield spreads and cosequently lower borrowing costs. However, during the COVID-19 period of March 2020 to March 2021, when the Argentina and Ecuador sovereign debt restructurings occurred, investors bond pricing behavior was differentiated depending on the inclusion or not of enhanced CACs, with their inclusion being positively associated with yield spreads, maybe due to the lack of flexibility of investors binded by the enhanced CACs provisions. The results obtained for September 2014 to February 2020 continue to hold when the sample is extended to March 2021.

Keywords : collective action clause; sovereign bond contractual clause; governing law; sovereign debt restructuring; default; bond spreads; sovereign cost of borrowing.
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