Welcome To The New "Yield Hunger Games"

Tyler Durden's picture

Nope, no bubble here... The FT reports that issuance of payment-in-kind (PIK) notes have doubled this to reach $4.2bn. "We call it the yield-hunger games," jokes one bond manager as even the most modest pick-up in yield is in great demand - no matter what the risk. As another manager warns, "I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle."



We have discussed the surge in PIK note issuance (here, here, and here), but the recent surge is becoming so glaringly bubblicious that even the Fed will be forced to see it in hindsight soon... (as The FT reports)

The sale of complex debt products popular in the pre-crisis boom years has soared in 2014 as investors have embraced riskier assets in exchange for higher returns.


Issuance of US-marketed payment-in-kind notes - which give a company the option to pay lenders with more debt rather than cash in times of crisis - has almost doubled so far this year to reach $4.2bn, according to Dealogic. That is the highest amount since the same period of 2007, when a record $5.6bn in PIK notes were sold.




“We call it the yield-hunger games,” said Matt Toms, head of US public fixed income for Voya Investment Management. “In this environment of very low yields and very low volatility, any extra yield that products such as these may offer already helps.”


On average, PIK notes yield 50 basis points more than comparable high-yield bonds. Average yields on junk-rated bonds stood at 4.99 per cent on Tuesday, according to Barclays indices.




The PIKs being sold now are also more likely to be “reverse inquiry” deals, or transactions that come about because yield-hungry investors ask for them. Many of the deals are being used to pre-fund initial public offerings, rather than fund big LBOs, Mr Toms said.


Still, the proliferation of PIKs and other riskier debt structures has raised concerns among regulators that markets could once again be overheating.




“I’m glad regulators are trying to instil some discipline in the market,” said Michael Collins, a senior investment officer at Prudential Fixed Income.


“I have no doubt that the resurgence of PIKs and other risky debt deals is a sign that we are setting the stage for the next down cycle. It is still a couple of years away, but some of these deals will be very high on the list of defaults.”

Don't care about bonds? Excited that this will force money from bonds into stocks? You could not be more wrong...

The inability for the worst credit companies to finance cheapy to fund the buybacks that have kept their stocks afloat and this their entire businesses throughout this false recovery means - as is always the case - the credit cycle will 'cycle'

In other words, Carl Icahn's worst nightmare - an inability to lever up and financially engineer magic from revenue-less and profit-less companies.

The key point being made in The Global Endgame is that the entire global economy is in the final stages of the "winter" cycle of credit destruction and collapse of phantom collateral...
1. "Boost Phase" of Credit Expansion
2. Overextended Credit Expansion and Over Capacity
3. Financialization and Collateral
4. Era of Financialization
5. Growing Malinvestment
6. Phantom Collateral from Asset Bubbles
7. Bubble Implosions
8. Impaired Debt and Policy Decisions
9. Stalled Consumption
10. Cheap Money Offered
11. Shrinking Loans and Bank Speculation
12. Search for Yield from Shrinking Pool of Productive Assets
13. Increasingly Speculative Investments with high Risk - YOU ARE HERE
14. Stagnation: Over-indebted, overcapacity with limited growth

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Zirpedge's picture

Considering the lack of volume maybe we are in stage #14...#15 lift off..to the moon Yellen!

Soul Glow's picture

Small volume has been so good for so long; keep walking that tightrope Larence Summers' policy tools!

knukles's picture

Oh boy.  I remember the last time PIKs were a "really good deal, a great opportunity."
Shit's not just like fiat, but script not exchangeable into fiat.

Oh boy oh boy oh boy ....

Soul Glow's picture

AC/DC sang it's a long way to the top....

Well, in finance it's always a long way to the bottom.

Remember '87?  '01?  '08?  yeah, it's ok, no one else saw those coming either.

Stay safe, commoner.

intric8's picture

The financial industry will morph and adapt to govt regulation by creating one new risky exotic scheme after another, each more complicated and entrenched than its predecessor.. How will it ever end? Everyone participates thereby eliminating personal accountability, and the system gets the blame

Caviar Emptor's picture

Cheap money begets cheap money. With the Fed spigot set to "on", all paper assets will just get dangerously cheap. You get what you pay for. Until the marginal incremental value of risk goes negative. Call it capitalist anti-matter

fonzannoon's picture

don't you mean all paper assets will get dangerously expensive? By the time we get to the crashy point yield will be driven into the ground in all assets. Even real estate for that matter will become so expensive as everyone squeezes every last ounce of juice out of that rental income until there is no yield. Then....bye bye....

Caviar Emptor's picture

I was alluding to exceedingly miserly yield and return in exchange for lots of cheap fiat. The marginal yield on oncrmental capital will be crushed. So even large investments will pay stink. Because there really is no risk with the Fed as ultimate backer. In other words, lending indirectly back to the Fed via its minions will soon yield zero and then negative

Ben Ghazi's picture

Katniss Everdeen is in this movie too.


She lives in Federal Reserve District 12.

GaitherJ's picture

.gov will realize they can't beat the free market when helll freezes over.

Enlightened .gov overlord "we have more data....this time we can fix it."

Chipped ham's picture

 "so glaringly bubblicious that even the Fed will be forced to see it in hindsight soon"




Caviar Emptor's picture

Stagnation would be a gift !
Instead we'll get biflation: inflation combined with contraction of the productive economy, employment and advancement, real median income, and of course collapsing demand. Yet input costs for business and consumers will rise ever higher.
Think I'm a dreamer? How bout gas prices rising while total miles driven and total consumption declines, how bout japanse consumer prices surging just when employment and wages crater.
Lotsa luck my buddies! Welcome to the new normal

AccreditedEYE's picture

You have been saying this for a long time. I do believe you'll eventually be proven correct.

Soul Glow's picture

bond market vs. cash market vs. stock market vs. gold/energy market in a Royal Rumble!

what's that smell's picture

The Empire Strikes Back: collapse of the phantom collateral.

KnuckleDragger-X's picture

I love the smell of napalm in the morning...

Caviar Emptor's picture

Bottom line: you can't get paid for risk when there is no risk. As long as the perception remains that the Fed backs all paper, it's all really a flight to safety. Investing in productive enterprise: now that's taking chances!

Kreditanstalt's picture

There is no real "yield"...just capital misallocations brought on by artificially-low "interest rates".  This is the new normal no-growth world.  Sooner or later, all the "high yield" offerers will become insolvent. 

Luckhasit's picture

My question is where else can all of that money go?  Bubbles in so many places.

Colonel Klink's picture

Let the snake consume itself.  Fuck you on Wall street!