Toggling for dollars

7 November 2012 By Agnes T. Crane

Investors should be wary of bonds that can pay IOUs in lieu of interest. But a rash of issuance to fund dividends to private equity firms doesn’t yet look like a 2007-2008 rerun. The recent deals have protections built in that should help keep reckless behavior in check.

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Issuance of payment-in-kind bonds, known as PIK-toggle notes, has reached $4.4 billion this year as of Oct. 24, according to Standard & Poor’s Leveraged Commentary & Data. The structure allows the issuer to elect to pay interest with more debt under certain circumstances.

TransUnion sold $400 million of PIK-toggle notes on Oct. 23 at a yield of 8.2 percent. If the issuer elects to pay interest with more debt, the yield increases by 0.75 percentage point.

U.S. high-yield bond issuance in 2012 has already topped the all-time annual record of 2010, with $268.3 billion of bond sales, according to a Thomson Reuters tally on Oct. 26.

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