In the riskiest end of the credit spectrum are mezzanine finance and payment-in-kind notes.
Credit derivatives are soaring in value and payment-in-kind notes (which pay interest with more debt, rather than cash) are in vogue.
They had previously been happy to extend credit on easy terms, such as "covenant-lite" loans (debts with few checks on operating performance) or payment-in-kind notes, where borrowers can substitute more debt for interest payments.
And investors in riskier "payment-in-kind" notes, a sort of hybrid bond where interest payments can be made by selling more debt, received only about 1 cent on the dollar.
At that point, the Treasury began to announce that it would suspend payment of interest to foreigners on United States federal debt except by the issuance of so-called P.I.K., or payment-in-kind, notes of the Treasury.
Finally, more exotic forms of borrowing such as payment-in-kind notes, which allowed companies to pay interest in bonds rather than cash, have faded for now, at least.The new conditions that the banks finally imposed on First Data after long negotiations with KKR are considered to have been quite lenient.
We will now hear a lot less about firms getting "covenant lite" loans, under which lenders give up their rights to monitor the behaviour of borrowers; or "payment-in-kind notes", which allow borrowers to substitute more IOUs for interest payments.
… In a list of its biggest unsecured creditors the company named Wilmington Trust, NA as agent for about $292 million in senior unsecured notes, Bank of Oklahoma as agent for about $132 million in senior subordinated, discounted notes and Wells Fargo Bank, NA as agent for $63.6 million in so-called payment-in-kind notes.
As Daniel Arbess of Xerion Capital Partners points out, corporate lending's giddy leverage echoes the high loan-to-value ratios in subprime; the explosion of "covenant-lite" deals and payment-in-kind notes mirrors that of interest-only and negative-amortisation mortgages; and leveraged buy-outs have their own form of mortgage refinancing in the so-called dividend recapitalisation.
They said the cash they were being asked to put up was destined to help cut New Look's £1bn of debts – £360m of which was particularly onerous payment-in-kind notes, issued in 2006 to pay a special dividend to its private equity owners.
