Window closes for PIK notes

Author: | Published: 1 May 2005

The cooling bond market has shut the door on European payment-in-kind (PIK) notes, a risky form of high-yield debt that took off between December last year and March.

Private equity houses took advantage of the red-hot market for five months to cash out expected initial public offering proceeds early. Spreads were so tight and demand so great in the conventional bond markets, that yield-hungry investors, especially hedge funds, were prepared to buy the notes despite their deeply subordinated structure.

PIK notes don't pay out real money until maturity and investors are ranked senior only to the equity, making the recovery of cash in an insolvency or restructuring effectively impossible.

Issuers normally use PIK notes to fund payments to shareholders, who are almost always private...