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