Jan 21 (The following statement was released by the rating agency)
Last year set a record for the number of U.S. payment-in-kind (PIK) debt issues and 2013 was
the third-highest in terms of issuance volumes since 2005, driven by dividend payouts to private
equity sponsors and debt refinancing, according to a Fitch Ratings report.
U.S. PIK issuance totaled $14.8 billion in 2013, surpassed only by levels in
2007 and 2008. In total, there were 36 PIK notes issued in 2013.
Despite the resurgence in volumes, Fitch notes that PIK debt remains a both a
niche and relatively expensive product for deeply speculative-grade issuers. PIK
notes accounted for less than 5% of the $315 billion of U.S. high-yield debt
issued last year. The average interest rates on PIK debt issues completed over
the past eight years was approximately 10.5% cash and 11% in kind, (averages
include issues that have a combination coupon with PIK and cash components and
therefore an equal cash-pay and PIK coupon).
The proceeds from many of the 2013 deals were used to fund dividend payouts to
enable private equity owners to cash out of a portion of their holdings or to
refinance existing debt and extend maturities. Recent PIK transactions have
been structured more conservatively than pre-crisis issues, with inclusion of
contingent cash-pay features and less flexibility to pay in kind.
Fitch analyzed the form of coupon payment (cash or kind) for 119 issues and
found moderate reliance on in-kind payments: 41% of issuers made all coupon
payments to date in cash, 29% made all payments in kind, and the remaining
issues had a payment history of both cash and in-kind payments.
Fitch's analysis found that post-crisis PIK issuers were less leveraged one year
after their PIK debt issuance dates than pre-crisis PIK issuers. Fitch
calculated median debt leverage ratios of 7.2x for a group of 20 post-crisis
issuers versus 9.4x for a 25-member pre-crisis group based on LTM periods
following the PIK issuance dates. Similarly, the post-crisis group posted
stronger median FFO interest coverage of 1.6x compared to 1.4x in the pre-crisis
The full report 'Payment-in-Kind' (PIK) Debt: U.S. Market, Credit and Payment
Trends' is available at 'www.fitchratings.com' or by clicking on the link.