2014 Outlook for PIK Offerings

Payment-in-kind debt issuance expands as investors expect economic growth to pick up.

The riskiest types of corporate bonds are getting a makeover, providing more protection for investors while showing the limits of a rally in junk-rated debt that pushed yields to a record low.

Issuers from Neiman Marcus Group Ltd., which sold in October $600 million of notes that allow it to make interest payments in more debt instead of cash, to Jacksonville, Florida-based Bi-Lo Holdings LLC led $14.8 billion of payment-in-kind (PIK) offerings in the U.S. last year, the most since 2008, according to data compiled by Bloomberg and Fitch Ratings. The 36 issues were a record.

Bi-Lo, the Southern U.S. grocery chain, issued $475 million of five-year PIK notes on Sept. 17; they have an in-kind payment option at 9.375 percent that is triggered by the company’s restricted payment capacity under its credit agreement, according to Fitch. The less capacity the company has, the greater the portion of its interest it can defer, safeguarding Bi-Lo’s financial stability in the event cash flows deteriorate.

During the financial crisis the payment-in-kind structure became associated with overeager debt-issuance practices, and the recent spate of offerings has caught the attention of international regulators.

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