PIK toggles

Cheap Financing Of Dogs Not Entirely Positive News

I for one was heartened a few weeks ago by Petco’s PIK-toggle dividend recap debt deal at 8.5%, which I interpreted as a moderately bullish signal of economic confidence while also keeping an open mind to the possibility that it was simply a one-off indication of investor love for dogs. Dogs! Today the Journal provides additional similar data points and the recovery seems to go beyond the pet-supply sector:

Debt issued to fund private-equity dividends has topped $54 billion this year, after a flurry of deals earlier this month, according to Standard & Poor’s Capital IQ LCD data service. That is already higher than the record $40.5 billion reached in all of 2010, when credit markets reopened after the crisis.

Also some of these deals involve a risky type of debt known as “payment in kind toggle”—or PIK-toggle—bonds that give companies the choice to defer interest payments to investors. Instead, they could opt to add more debt to the balance sheet. The default rate for companies that sold PIK-toggle bonds was 13% from 2006 to 2010, twice the default rate for comparably rated companies that didn’t use the bonds, according to a study by Moody’s Investors Service.

If you use PIK-toggle-dividend-recap as a barometer of economic activity, and of course you do, then yes it is definitely creeping toward its highest, “2006” setting. On the other hand another barometer isn’t. Equally enjoyable was the Journal’s companion piece on the bad news implied by dividend recaps: Read more »