High-yield underwriters in Europe including Goldman Sachs and Deutsche Bank have eased up on structuring pay-in-kind bonds, after having whipped up issuance in the first quarter of the year. Goldman and Deutsche Bank were among the most active originators of PIK note sales and are now employing new structures as these bonds have fared poorly. "The PIK note market is closed for the time being," remarked a London-based high-yield banker.
Bankers are now recommending issuers offer PIK loans rather than notes. The key difference is loans cannot be shorted, as there is no repo market from which loans can be borrowed. "The loans trade on the merits of the underlying: non-cash-pay and par call," noted one high-yield banker. Meanwhile, the investor base for PIK notes and loans is the same, namely hedge funds with the flexibility to invest in either.
European telecommunications satellite company Eutelsat was the first to employ the PIK loan format late last month in a E300 million deal underwritten by Goldman, Deutsche Bank, Bank of America and BNP Paribas. The market had anticipated a note but bankers said the change was in response to buy-side calls for a private deal to avoid the volatility of the public PIKs. Louise Tingström, spokeswoman for Eutelsat, could not provide a comment from the company's finance department by press time.
The new strategy comes as PIK notes have traded down sharply in the secondary market, with all seven deals from the last quarter below issue price. "The problem is PIK notes are very vulnerable to short-selling in the market," said one leveraged finance banker. From a trader's perspective, PIK notes are a cheap short as there are no coupon payments to cover. The hardest hit bonds are those issued by companies with no immediate prospect of a take-out or initial public offering, dubbed "PIKs to nowhere." Examples include Ardagh Glass's and Eco-bat's PIK notes, which were trading in the mid-80s last week.