Michael Bradley & Mitu Gulati 1820-1980 Sovereign bonds - PowerPoint PPT Presentation

Michael Bradley & Mitu Gulati 

1820-1980 – Sovereign bonds almost never contained “collective action” provisions Contract 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

10 20 30 40 0 1976 1977 1978 1979 1980 1981 1982 1983 Figure 1. Total Number of NY Issues, Number with CACs 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 3. Minimum Percentage Votes to Modify Payment Terms in English Bonds 20 0.19 Number pf Bonds 15 0.25 10 0.38 0.50 5 0.75 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 11. Total Number of Issues by Governing Law 40 30 NY 20 English Others 10 German 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Panel 1: NY Law Bonds Panel 2: English Law Bonds Independent 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 R 2 0.44 0.27 0.03 0.58 -0.01 0.64 Observatons 155 57 97 79 65 15

Panel 1: NY Law Bonds Panel 2: English Law Bonds Independent 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 R 2 0.34 0.34 0.00 0.61 18.00 0.81 Observatons 140 52 87 78 62 14

Panel 1: NY Law Bonds Panel 2: English Law Bonds Independent 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 R 2 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 Bonds Independent 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 R 2 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

 Congo  Ivory Coast  Belize  Argentina  Uruguay  Dominican Republic  Dominica  Seychelles  Iraq  Greece