The use of collective action clauses (CACs) in public bonds has received significant attention in academic and policy circles in recent years. While the existing literature suggests that market participants in sovereign and corporate bond markets often opt to include CACs when allowed under the applicable governing law, whether CACs create or destroy economic value is an open question. Notably, the studies examining the value of CACs have largely focused on sovereign bonds, devoting minor attention to public corporate debt, a gap in the literature which this Article addresses.
This Article assesses the value of CACs by exploiting a recent reform in the legal regime governing CACs in Chile, wherein previously banned CACs are now allowed in public corporate debt. Interest rate spreads for bonds issued with a CAC after the reform are on average 20% lower than those of bonds that do not include such clauses. The average effect, 28.5 basis points, translates to annual savings of over U.S. $415,000, which add up to approximately U.S. $6.0 million during the course of the life of the average bond. This finding is robust to controlling for various issuer characteristics and is replicated in specifications that include issuer fixed effects, confirming that these results are not driven by unobservable issuer characteristics. The analyses also suggest that including a CAC can potentially benefit all issuers regardless of their creditworthiness, a result contrary to earlier studies in this area.
These findings provide a positive assessment of the recent legal reforms in Chile and, most importantly, strengthen the case for repealing the longstanding prohibition on CACs in public corporate debt issued under U.S. law. The experience in Chile suggests that repealing this ban on CACs would result in lower interest rates, substantially reducing the cost of capital for U.S. corporations, the vast majority of which primarily rely on the bond markets to conduct their financing activities.
Collective Action Clauses & Corporate Bond Spreads: Evidence from Chile,
Nw. J. Int'l L. & Bus.