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PIK marches into 2014, and marches into loans

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By Olivier Holmey
27 May 2014

Will payment-in-kind debt ever lose the power to shock and bewilder? After a short respite, one of high yield’s most controversial creations has returned to the market. Investors are scooping it up like gluttons, but they should be wary of agreeing to ever more aggressive terms.

The latest example of this trend came just last week, when food producer and retailer Agrokor signed a PIK toggle deal of €485m. It was the first such transaction out of Croatia, and a rare example of PIK debt being structured as a loan.

In PIK toggle deals, the issuer can pay some interest in cash and some in further indebtedness, depending on circumstances. To achieve such aggressive conditions, issuers mostly structure the deals as bonds, which allow for greater public scrutiny.

Last year, when PIK assumed a prominent place within European leveraged finance, to the great dismay some bankers and investors, 13 issuers raised money through PIK notes, according to Dealogic. Only one successfully placed a PIK loan.

So unusual is that type of debt that many expected Agrokor’s deal to stall. One banker away from the transaction said investors would balk at the lack of forward-looking financial statements. As it turned out, the issuer received strong demand and did the deal without a glitch.

Of course, Agrokor is not any old company, just as Croatia is not any old emerging market. The B2/B rated firm is Croatia’s largest privately owned business, and is well known among the continent’s lenders.

But the deal’s success suggests the market is willing to tolerate terms that are even more overwhelmingly favourable to issuers, when many had considered last year’s trend to have already gone too far.

Both strands of leveraged finance have their bugbears. For loans it’s covenant-lite, for bonds it’s PIK. Little is being done to prevent issuers of either from pushing terms even further, and, perhaps it is getting out of hand.

By Olivier Holmey
27 May 2014