PIK Toggle Issuance Is Bubbling Over Again...Last Time Around This Was the "Beginning Of The End"

Tyler Durden's picture

In hindsight, the 2007 ramp in PIK Toggle note issuance was a pretty good indicator that the high-yield market was frothing over and the party was near an end.  After all, it's probably not a good sign when a market completely loses discipline to the point of rushing to hand out nearly $20 billion dollars to companies that are basically admitting they may not even be able to afford the interest on the loan.  Alas, as so often is the case, history seems to be repeating itself with PIK Toggle issuances up massively so far in 2016.

PIK Toggle


As Bloomberg notes, September is on track to be the busiest month in years for new PIK Toggle issuances.

Just a week in, September is already on track to become the busiest month for so-called payment-in-kind toggle notes that let companies pay coupons with more debt, according to data compiled by Bloomberg. Ardagh Group SA, a Luxembourg-headquartered packaging company, sold $1.72 billion of the securities. German auto components maker Schaeffler AG is poised to sell 3.59 billion euros ($4.05 billion) of the notes on Thursday, more than 1 billion euros than initially planned, which would make it the largest PIK issue ever, Bloomberg data show.


Investors desperate for high yielding assets are cutting companies more slack and accepting weaker debt terms because central bank stimulus has sent yields on $11.4 trillion of securities below zero. Average yields on junk-rated bonds slumped to a record low in Europe and globally are dropping toward unprecedented levels reached two years ago, according to Bloomberg Barclays bond index data.


“Issuers have the upper hand today,” said Rick Rieder, global chief investment officer of fixed income at BlackRock Inc., which oversees $4.6 trillion assets. “You’re seeing lower covenants and more PIK issuance come to the market. I think you have to be thoughtful about where you take risk and how you take risk.”

While Mike Collins, a portfolio manager at Prudential Fixed Income, echoes our fears that when companies actually start PIKing interest it is typically a sign of the "beginning of the end."

“If a company really feels like it’s important to them to pay up to have that feature, you have to wonder as a bondholder if they’re really worried that they’re going to run out of cash someday.  When they start PIKing these things, it’s generally the beginning of the end.

Of course, these new issues comes as the "reach for yield" trade is pushing high-yield spreads back to multi-year lows...

High Yield


...While defaults are already starting to spike.

HY Defaults


Meanwhile, IG issuances are on track to set an all-time record of over $1.3 trillion as pensions and insurance companies look for long-duration fixed income alternatives to low, or negative, yielding sovereign debt.

IG Issuance


Just another unnatural consequence of central banking policies...at some point this will all end badly but for now the party continues.

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venturen's picture


Jim Sampson's picture

More like a Debt Jubilee. 


I always get fucked.

Arnold's picture

Don't you worry.

We are the counter party for a large part of the defaults.

Taking away uncertainty relieves the anxiety associated with worry.

knukles's picture

You can pick your friends
You can pick your nose
The guy who you thought was your friend's gonna pik your income

johngaltfla's picture

I read about the issuance increase and also heard the corporate bond "experts" on Bloomberg yesterday singing "don't worry, be happy."

Of course that would be before the risk of a naturally occurring cyclical selloff in sovereigns happened causing the corporate bond yield curve to steepen dramatically.

PIK issuance as definied by what Bloomberg said in their article and on the air is 100% incorrect; it is just like 1999-2000 when cash flow issues hit the debt servicing ability of the .bombs which lead to the NASDAQ crash. We are just repeating history and it ain't gonna be pretty because THIS current generation has never really experienced a hard core finale to a cyclical bear market. This 18 year bear is on its final legs and it is gonna rape and rip the ass of every stock virgin unprepared for what happens next.

Barring mega-stupidity, which is now part of political reality, SPX 666 is a viable downside retest target.

Lonesome Crow's picture




Why go with the expressway traffic?


847328_3527's picture

How many times have I heard this Bubble is going to collapse?

Lonesome Crow's picture

'round about when the flow of counterfeit is reeled?

Lets define the Bubble. Is it not the pull of the government into the hands of oligarchy out of the clutches of democracy?

It is a 100 year+ "Bubble."

bleu's picture

The coming Financial CATACLYSM. It'll be Ugly, Bloody, and Messy. http://bit.ly/1KogtGi

jeff montanye's picture

the part i didn't get is defaults are rising as (quality) yield spreads are tightening.

Lonesome Crow's picture

Quite an inappropriate name for yourself, then?

Cooler heads prevail...

glenlloyd's picture

Yeah, there might be a 'jubilee' but it won't be for us. It'll be another round of bailout injections for TBTF institutions whose demise might put the financial system at risk.

IMO regulators/congress was asleep at the wheel when anything became TBTF.

johngaltfla's picture

This is a new/old bubble. PIK was fashionable at the end of the internet bubble. It blew up an bondholders got screwed as did those who believed the financials and purchased equities with 150:1 P/E ratios.

Considering that the accounting practices now are worse than they were in 1999, I would say we are back there again, except this time, the illegal shit was committed with the belief the Fed would buy everything.

Which they will.

After the crash.

Lonesome Crow's picture

We could also ask, has the bubble ever "ended?"

2007, the moment of previous PIK concern, zbz around 116.12.

Now, the moment of "hey remember when the bubble burst last time," zbz around 166.20




Doom Porn Star's picture

"Barring mega-stupidity, which is now part of political reality, SPX 666 is a viable downside retest target. "


The Long Goodbye is coming to an end.

Hail Satan.

Burr's 2nd Shot's picture

Why worry when you can pray?

Arnold's picture

I have to admit my wife prays for my immortal soul all the time.

The desired out come of the to date, one sided conversation on her part, is for me to forsake all other bills, with the exception of the substantial Life Insurance Policy.

fishwharf's picture

I read the whole article and I still don't know what a PIK Toggle is, nor do I care.

Doom Porn Star's picture

Fancy ass swinging dick speak for rolling debt -both principal and interest- because you can't pay fucking anything when the loan is due.

Extend and pretend.

SloMoe's picture

Sounds like making your credit-card payment, with a credit-card...

Winston Churchill's picture

A higher interest rate credit card.

Another name for it is desperation.

Nolde Huruska's picture

More like making your low interest mortgage payment with a much higher interest credit card.

zagzigga's picture

100 year mortgages with zero down, zero payments for the first 30 years of the loan sounds like a great credit expansion idea! Markets to the moon! lol

knukles's picture

Long and short of it is that covenants in some deals is gettin' mighty flaky
Over and out!

knukles's picture

Now that's what I'm talkin' about!
Gimme sum dat

Consuelo's picture



The 'lite' ones - you know, not too heavy and easy to digest...

knukles's picture

The Why Can't We All Just Get Along Covenants

Chris88's picture

Only the broadly syndicated market is covenant-lite, most privately agented leveraged loans have the standard 4-5 on.

consider me gone's picture

I don't either but it sounds like companies issuing debt to make interest payments. Sounds like paying off the interest on an old credit card with debt from a new credit card. How good can that be? 

knukles's picture

Actually if the "toggle" it, in so many words, they can just give you MOAR bonds instead of cash.
See, now everybody thinks they're the fucking Fed.

The central planners's picture

Bloomberg knows and that all that matters.

besnook's picture

borrowing from peter to pay paul who is also borrowing from peter every month.

GeezerGeek's picture

Peter is a dick. If Peter would simply stop lending the system will eventually right itself. Peter is to blame.

Chris88's picture

Read a loan primer so you don't sound like some of the others here.

Yen Cross's picture

 Welcome to Starbucks. Would you like to apply for a $1000.00 line of credit @ 50.00% apr at Wells Farce-Go???

Consuelo's picture



I miss the days of those heavy-duty up & down metal toggle switches.   You knew by the feel when something was 'On' or 'Off'...

MonteChristo's picture

I still have the push button switches from old, and am installing more. Solid stuff.

MonteChristo's picture

I still have the push button switches from old, and am installing more. Solid stuff.

QEsucks's picture

I was looking for additional info on PIK issuance. cough J Crew cough when I stumbled onto a website with similar content

silveristhenew.com  -never saw it before. Tyler doesn't give attribution so it must be the other way around?

One unique thing on the other site however was the parasitic turtle flatworm recently named after- I won't spoil it for anyone.

Baracktrema obamai

Chris88's picture

I'd be interested in the breakdown of PIK toggle in HY versus leveraged loans.  The most disciplined lenders in the latter aren't touching the stuff, although leverage multiples are definitely up.  Not as crazy as people think though as certainty of closing has taken precedent over pricing and thus sponsors have realized they can't push the envelope as much.

SilvaDolla's picture

I imagine that when things REALLY start nose-diving this time, none of us will be able to get on ZH for these group therapy sessions. I'll miss you guys. See you on the other side when the cannibalism subsides.