Michael Bradley & Mitu Gulati - Reykjavík · PDF fileCorporate Analogy – We see...
Transcript of Michael Bradley & Mitu Gulati - Reykjavík · PDF fileCorporate Analogy – We see...
1820-1980 – Sovereign bonds almost never contained “collective action” provisionsContract terms were “individual rights” that each holder had (unanimous approval needed to alter a bond)Problem: costly and slow restructurings can have externalities (necessitate bailouts)After Mexico 2005 and US bailout, policy solution was: Allow Collective Action
Making Restructurings Easier will Induce Irresponsible Debtor Behavior b/c costs of default are lower
Ex ante, cost of capital will rise Will be especially like to rise for the weakest
issuers whom the markets trust the least Corporate Analogy – We see the weakest
issuers having to consent to the toughest contract restrictions
The Idea of using CACs in Eurozone Sovereign Bonds was first announced in November 2010
Markets did not appear pleased with PSI talk (Story – CACs are a signal of PSI)
If this CAC/Signal story is right, will their inclusion starting in 2013, increase borrowing costs?
Prior study (E&M, 2000; 04) says yes & no (yes for poor counties; no for rich ones)
It was all done with data prior to 2003 Prior to 2003, the two dominant markets (NY &
UK) used separate standards (NY – no CAC; UK – CAC)
Cannot do a within-country test of the effects of CACs
After 2003; much more variation in both NY and UK
In any event, Eurozone question is not about unanimity versus 0.75
2003-2011 Thomson One Banker – 700 bonds for U.K. and
N.Y. law issuances Cannot test the question prior studies
examined (shift from unanimity to 75%) Can examine the variation in Modification
Votes; Acceleration and Trustee/Committee data
Focused exclusively on the effect of a shift from unanimity to .75 to change payment terms of bond
Today – almost no unanimity terms left (US Treasury Initiative in 2003) – and almost no variation in U.S.
We can test other forms of CACness .75 to .1875 continuum Acceleration; Trustees
0
10
20
30
40
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
CAC
Total
Figure 1. Total Number of NY Issues, Number with CACs
0
5
10
15
20
Nu
mb
er
pf
Bo
nd
s
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
0.75
0.50
0.38
0.25
0.19
Figure 3. Minimum Percentage Votes to Modify Payment Terms in English Bonds
0
10
20
30
40
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
German
Others
English
NY
Figure 11. Total Number of Issues by Governing Law
Panel 1: NY Law Bonds Panel 2: English Law BondsIndependent Total Investment Grade Non-Investment Grade Total Investment Grade Non-Investment Grade
Variables
Ratings:
AAA . -1.58***(-3.237)
AA -2.05*** -1.17*(-6.76) (-1.77)
A -0.49 -1.63***(-1.25) (-3.33)
BB 1.22*** 0.32(4.06) (0.55)
B 1.63*** 3.13***(5.03) (2.98)
Bank -0.03 -0.19*** 0.02* -0.05 -0.03 -0.02(-1.39) (-3.83) (1.72) (-1.50) (-0.58) (-0.62)
Shelf 0.14 0.65 0.14(0.72) (1.66) (0.14)
Amount 0.16 0.35 1.05(0.81) (1.62) (1.79)
Vote 3.95*** 0.81 14.18*** 0.88 -0.48 8.51***(2.83) (0.45) (7.08) (1.09) (-.57) (4.23)
Euro -0.25 0.06 -0.11(-0.60) (0.14) (-0.18)
Pound -0.25 -0.17 .(-0.49) (-0.39)
Constant -0.83 1.49 -7.36*** 1.13 -0.78 -5.60(-0.72) (1.04) (-4.64) (1.00) (-0.69) (-1.63)
Adjusted R2 0.44 0.27 0.03 0.58 -0.01 0.64Observatons 155 57 97 79 65 15
Panel 1: NY Law Bonds Panel 2: English Law BondsIndependent Total Investment Grade Non-Investment Grade Total Investment Grade Non-Investment Grade
Variables
AAA . -1.46***(-4.52)
AA -1.58*** -0.69(-4.97) (-1.53)
A -0.37 -2.04***(-0.77) (-3.52)
BB 1.06*** -0.93*(3.43) (-1.72)
B 1.48*** 3.75***(4.41) (4.53)
Bank -0.05 -0.21*** 0.02** -0.04 -0.06 0.37(-1.54) (-3.77) (2.27) (-1.00) (-1.39) (0.94)
Shelf 0.21 0.11 0.32(0.65) (0.28) (0.91)
Amount 0.17 0.38** 0.54(1.21) (2.37) (1.06)
Vote 3.51 7.61*** 13.16*** -1.82* -2.01** 8.29***(1.51) (20.08) (2.90) (1.83) (-2.11) (6.42)
Disenfran 0.07 1.45 -0.20 1.5*** 1.25*** -0.52(0.16) (6.21)*** (-0.53) (3.28) (3.60) (-0.79)
Euro 0.20 -0.02 0.08(0.77) (-0.05) (0.14)
Pound 0.16 -0.59 .(0.35) (-1.69)
Constant -0.39 -4.28*** -6.65** 1.55** -0.61 -4.12(-0.21) (-9.99) (-1.91) (2.06) (-0.81) (-1.57)
Adjusted R2 0.34 0.34 0.00 0.61 18.00 0.81Observatons 140 52 87 78 62 14
Panel 1: NY Law Bonds Panel 2: English Law BondsIndependent Total Investment Grade Non-Investment Grade Total Investment Grade Non-Investment Grade
Variables
Ratings:
AAA . -1.57***(-3.50)
AA -2.04*** -1.11*(-6.14) (-1.70)
A -0.30 -1.42**(-0.61) (-2.57)
BB 1.2*** 0.14(4.00) (0.25)
B 1.67*** 3.25***(4.44) (3.29)
Bank -0.03 -0.2*** -0.01 -0.04 -0.04 0.20(-1.19) (-3.72) (-0.43) (-0.77) (-0.47) (1.10)
Shelf 0.11 0.87 0.02(0.53) (1.73) (0.0.)
Amount 0.21 0.03 0.41(1.04) (0.09) (1.11)
Vote 3.49** 0.98 10.56*** -0.60 -2.96 7.69***(2.08) (1.00) (5.70) (0.45) (-1.06) (8.34)
ACC 0.06 0.65** -1.14** -0.16 1.92 -0.75**(0.15) (2.26) (-2.65) (-0.26) (1.18) (-2.84)
Euro -0.03 0.33 0.10(-0.07) (0.67) (0.25)
Pound -0.26 -0.25 .(-0.49) (-0.53)
Constant -0.50 0.76 -3.37** 0.96 1.22 -2.16(-0.35) (0.73) (-2.06) (0.87) (0.54) (-1.09)
Adjusted R2 41.00 0.24 0.07 0.49 0.07 0.83
Observatons 146 52 92 80 68 14
Panel 1: NY Law Bonds Panel 2: English Law BondsIndependent Total Investment Grade Non-Investment Grade Total Investment Grade Non-Investment Grade
Variables
Ratings:
AAA . -2.09***(-3.74)
AA -1.82*** -1.53*(-3.57) (-2.01)
A 0.20 2.76***(0.48) (-3.37)
BB 1.23*** -1.69*(4.30) (-1.83)
B 1.97*** 2.76**(7.38) (2.49)
Bank -0.06* -0.19*** 0.3* -0.08 -0.05 0.30(-2.04) (-3.54) (1.72) (-1.37) (-0.97) (1.29)
Shelf 0.25 0.03 0.28(1.20) (0.08) (1.31)
Amount 0.05 0.4* 0.54(0.23) (1.95) (1.141)
Vote 2.18 2.08** 14.4*** -2.56 -2.17 9.23***(1.00) (1.96) (5.47) (-1.53) (-1.24) (9.51)
Trust / Com -0.10 0.23 0.29 1.91** 0.99 -1.3**(-0.37) (0.42) (0.99) (2.18) (1.30) (-2.67)
Euro 0.55 0.22 0.03(1.20) (0.46) (0.12)
Pound 0.52 -0.11 .(0.74) (-0.28)
Constant 0.48 1.25 -7.72*** 0.52 -0.85 -3.48(0.28) (1.58) (-3.08) (1.82)* (-0.79) (-1.33)
Adjusted R2 0.43 0.28 0.04 0.52 0.06 0.89
Observatons 136 49 87 82 63 14
Weaker issuers should have to use tougher (more constraining) contract terms
Ghanaian Contracts versus U.S. Treasury issues
But we find that the market wants to give weaker issuers more flexible contract terms?
Suspicious Move from Cross Section to Longtitudinal
Analysis