In the bond market, risky PIK toggle deals are back
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For the first time since the heady days of 2021, a company has issued a PIK toggle bond — which means if it can't make interest payments in cash, it can instead just give bondholders more bonds.
Why it matters: It's yet another sign of how frothy the credit markets are, despite the Fed's historic effort to tighten credit.
Driving the news: Calderys, a maker of heat-resistant clothes and casings, borrowed $300 million last week by issuing four-year bonds with an eye-popping 11.75% coupon.
- Because the bonds were issued at 98 cents on the dollar, their yield is actually 12.4%.
Between the lines: Calderys has to make a $17.6 million coupon payment on these bonds every six months. Alternatively, the company can issue $18.75 million of new bonds instead, and distribute them to bondholders in lieu of the cash payment.
- That option is known as payment-in-kind, or PIK. The ability to switch back and forth between PIK and cash makes these bonds known as PIK toggle.
- Calderys also has the option to buy back the bonds at 104 cents on the dollar in a year's time. If it does, that would represent an effective one-year yield for investors of 18.8%.
The bottom line: Risk-on, baby.
