December 5, 2008 / 12:11 AM / 11 years ago

UPDATE 1-Freescale opts to make PIK interest payment on debt

(Updates with background detail throughout, byline)

By Emily Chasan

NEW YORK, Dec 4 (Reuters) - Chipmaker Freescale Semiconductor Inc said on Thursday it will use its payment-in- kind option to make an interest payment on its debt next year, taking advantage of one of the debt relief tools offered by lenders in the height of the private-equity boom.

The company, which was bought out by private equity for $17.6 billion in 2006, said in a U.S. Securities and Exchange Commission filing on Thursday that it would use the PIK in lieu of making a cash interest payment.

Pay-in-kind, also called PIK-Toggle, allows companies to defer interest payments in favor of issuing more debt.

The PIK is “a prudent method to enhance liquidity in light of the dislocation in the current financial markets and the uncertainty as to when reasonable conditions will return,” Freescale said in the filing.

Under its debt agreement for the $1.5 billion in notes due in 2014, Freescale said it can elect to use the PIK feature for any interest payment period prior to Dec. 15, 2011.

The $40 per share buyout for Freescale is one of the top 10 largest leveraged buyouts in history. The private equity consortium was led by Blackstone Group LP (BX.N) and included Carlyle Group, Pemira Funds and Texas Pacific Group.

A number of private equity deals were struck during the recent private equity boom with softer covenants, allowing temporary relief to the companies during tough times.

The $17.6 billion buyout of Freescale Semiconductor was one such deal with both covenant light, which lacks the traditional restrictions on borrowers, and the PIK-Toggle.

Electing to use a PIK-Toggle option can been viewed as sign of stress. Moody’s said in a recent report it expects the number of companies using a PIK option to increase over the next year as operating cash flow shrinks and tight credit markets make it difficult to refinance long-term debt.

Moody’s said that, during the last two quarters, at least 11 high-yield issuers, including casino operator Harrah’s and retailer Claire’s Stores, elected to use the PIK option or said they intended to do so. (Reporting by Emily Chasan; additional reporting by Megan Davies; Editing by Andre Grenon)

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