Welcome To The New "Yield Hunger Games"

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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