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Bond Exchange Offers or Collective Action Clauses?

Working Paper
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This paper by Ulrich Hege (Toulouse School of Economics) and Pierre Mella Barral (TBS Business School) 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). The authors use a dynamic contingent claims model with a debt overhang problem, where both hold-out and hold-in problems are present. They 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.