A New Governance Structure for Corporate Bonds

Abstract

This paper proposes a new governance structure for publicly registered corporate bonds that combines the benefits of those bonds -- including liquidity and ease of diversification -- with the benefits of private debt contracts, e.g., tight covenants and ease of recontracting. We propose that a company appoint a supertrustee for its public debt whose authority goes far beyond that of a conventional indenture trustee. The supertrustee will actively monitor the company, enforce and, where appropriate, renegotiate a bonds covenants on behalf of public bondholders, thus resolving the collective action problem presently associated with dispersed ownership of public debt. With the supertrustee emulating the functions carried out by, for example, banks in private debt contracts, public bonds will have more and tighter covenants, their holders will be less apprehensive of unchecked actions by issuers, and there will be lower costs to relaxing a covenant when such relaxation is value-increasing. The supertrustee will thus reduce the cost of the conflict of interests between creditors and stockholders and will enable companies to issue bonds at higher prices (or lower yields) that will more than compensate for the costs of the supertrustee.

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