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PIK Toggles And The Credit Crisis.

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Despite the now two-month old rising stock and some signs that the frozen credit markets have unthawed, bad news continues to pour out of the credit markets. This morning the Wall Street Journal reported that a number of companies that issued debt with easy terms are now making use of those options to conserve cash. In particular, at least seven companies have exercised the option on $2.4 billion in bonds that lets them make interest payments by issuing additional debt instead of shelling out cash.
The PIK-toggle was extremely popular with private equity borrowers in the height of the buyout boom, and there were few banks that could resist offering it to the big buyout firms that were spilling deal fees like a oil-tanker in Alaska. They foresaw the cash-management advantage it would give them, allowing them to preserve capital when times were tight or threatening to tighten. With a pull-back in consumer spending widely anticipated--consumers have been going so strong for so long but plummeting confidence, rising prices, dropping home prices and credit card debt are thought to start dragging down spending soon--it makes a lot of sense for companies like Claire's, the costume-jewelry retailer taken private a year ago by Apollo, to conserve cash.
Of course, investors holding the bonds are howling. More importantly, with the bonds kicking back additional debt instead of cash, the PIK-toggle could put further strains on the credit market. Investors already stuck with bonds trading at distressed debt prices are unlikely to be willing (or able) to lend into new deals. Without cash coming in, there's less to push out, meaning the PIK-toggles could extend and deepen the credit crisis.

PIK and Roll: Companies Seize On Perks of Loose Lending Terms
[Wall Street Journal]