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

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.