Bangkok--9 Jul--Standard & Poor's
Pay-in-kind notes, also known as PIK toggle notes, became popular at the height of the easy money condition in 2006 and 2007. As companies' earnings and the overall economy deteriorated this past year, issuers turned to in-kind payments to conserve cash, said an article published today by Standard & Poor's.
Indeed, a sample of 53 PIK toggle notes, with $32 billion in total principal outstanding, issued by companies that currently are not in default reveals that 23 are paying in-kind or have announced that they will pay in-kind on a future coupon, while three are splitting interest payments between cash and additional notes, according to the article, titled "Payment-In-Kind Toggle Notes: Companies Are Hitting The Switch (Premium)." We also have identified an additional 10 companies with PIK toggle notes that have either filed for bankruptcy or exchanged their PIK notes.
"Default risk is high and recovery prospects are low among our sample of PIK issuers," said Diane Vazza, head of Standard & Poor's Global Fixed Income Research Group. "Given that PIK toggles often rank low in the capital structure, it is not surprising that the majority are rated '5' or '6'."
The vast majority of PIK toggle note issuers are private companies, with a large share having some private equity (PE) involvement. Indeed, PIK toggle notes were a favorite for PE firms to add debt at the bottom of the capital structure, with proceeds often used to finance a special divided to the PE sponsors.
"PIK toggles offer issuers the ability to conserve cash," said Ms. Vazza. "Nevertheless, a number of highly leveraged issuers of PIKs have filed for bankruptcy protection or have defaulted on one or more of their outstanding notes."
This article is part of our premium Global Fixed Income Research content, which is available to premium subscribers to RatingsDirect, at www.ratingsdirect.com. Ratings information can also be found on Standard & Poor's public Web site at www.standardandpoors.com; under Ratings in the left navigation bar, select Find a Rating. 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 Contacts:
Diane Vazza, New York (1) 212-438-2760