Not even a year removed from a crash in risky bonds, investors are already reaching for yield again. Bond issuers are putting payment in kind (PIK) provisions into newly issued junk bonds. PIK deals allow bond issuers to make interest payments with more debt. That’s like applying for a new credit card to make the minimum payment on an existing card.
With 10-year Treasury bond yields under 1% and the expectation that the Fed no longer has any red lines on bailing out investors, the reach for yield is back on.
The FT has more:
Private equity firms are testing investors’ appetite for returns with new sales of payment-in-kind bonds that offer juicy interest rates but are among the riskiest deals since the Covid crisis began.
The re-emergence of PIKs underscores how fixed-income investors are increasingly being asked to accept higher degrees of risk and more onerous terms from corporate bond issuers as soaring prices of higher-quality assets in recent months has deeply depressed yields.
A duo of highly-indebted borrowers are seeking to raise a combined $1bn through so-called PIK toggle deals, in which issuers are allowed to defer interest payments. The structure allows companies to pay interest using more debt, leading the amount that ultimately needs to be paid at the bond’s maturity to balloon.
Apollo and Platinum Equity, the private equity parents of the two issuers, will receive bumper payouts from the proceeds of the bond sales if they go through as planned.
The deals follow a flurry of so-called dividend recapitalisations through the loan market, where private equity owners have used borrowings to fund payouts from their portfolio companies.
Read more here.