Bangkok--17 Jun--Standard & Poor's The easy money conditions in the leveraged finance market in 2006 and 2007 set the ground work for a surge in issuance of pay-in-kind notes, according to an article published by Standard & Poor's. The article, which is titled "U.S. Credit Comment: PIK-Tock, PIK-Tock, Delaying The Inevitable (Premium)," says that the notes--also known as PIK-toggle notes--allow the issuer to pay interest with additional securities instead of with cash, which can provide the issuer with a way to preserve cash if the firm hits a rough patch. However, the feature comes at a price, as all cash interest accrues, and the coupon payment steps up at a predetermined rate. Many of the recent deals have been characterized with a 75-basis point set up in the coupon payment when the pay-in-kind feature is used. "PIK-toggle notes are risky for investors because current cash flow from the instruments falls as cash interest is delayed," noted Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "In a sense, this increases the investors' exposure to the firm as the interest accrues but is paid at a later date." Moreover, firms usually exercise the toggle feature when the default risk of the firm is rising (usually in a scenario where there is a need to conserve cash because of stress on earnings). When we examined a sample of 41 PIK-toggle notes totaling $22.9 billion in debt outstanding, we found that eight were used to fund or issued directly after a dividend recapitalization. Of the 41 PIK-toggle notes, four are currently paying in kind, and three have announced that they will pay the next coupon in kind. Ms. Vazza added that, "Default risk is high and recovery prospects are low among our sample of PIK issuers, as most have credit ratings below 'B-' and instrument-level ratings on the PIK instruments in the 'CCC' to 'B-' range." This article is part of our premium Global Fixed Income Research content, which is available to premium subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis, at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search. Members of the media may request a copy of this report by contacting the media representative provided. Media Contact: Mimi Barker, New York (1) 212-438-5054, [email protected] Analyst Contact: Diane Vazza, New York (1) 212-438-2760 Standard & Poor's, a division of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of financial market intelligence, including independent credit ratings, indices, risk evaluation, investment research and data. With approximately 8,500 employees, including wholly owned affiliates, located in 23 countries and markets, Standard & Poor's is an essential part of the world's financial infrastructure and has played a leading role for more than 140 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com. Key Contacts: Americas Media Relations: (1) 212-438-6667 media_ [email protected] Americas Customer Service: (1) 212-438-7280 [email protected]