You hear bankers say “this time it’s different” a lot. Especially since the Great Recession, these guys promised not to put toxic waste into the market so they could make a fast buck. The latest evidence of banks perfidy is the mini boom in Pay In Kind toggle bonds.
These were invented in the late 1980s in the skunkworks at Drexel. When the market collapsed, the PIK toggle recovery rate was single digit (you can usually get about 40 percent back on normal bonds). Then came the Credit Bubble and PIK Toggles came roaring back. This time, when the bottom dropped out, investors lost everything to the senior lenders above them in liquidation preference.
So why, today, when interest rates can’t get any lower and companies are shoveling cash at their shareholders, has the market happily absorbed two of these things?
Energy company Venoco debuted a $250 million PIK toggle bond on August 7 to refinance outstanding high coupon debt. Viking Cruises sold $150 million of them. This came only a day after medical products company ConvaTec sold $800 million.
According to LCD, “demand for PIK-toggle structures heated up again last month with $2.9 billion issued in July, making it the busiest month for these deals since October 2012 and the second busiest since the pre-Lehman days of September 2008.”