Payment-In-Kind Bond

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Payment-In-Kind Bond

A bond in which coupon payments come in the form of more bonds, rather than cash. At times, the investor has the option of choosing whether to accept cash or payment-in-kind, but more often this option resides with the issuer. A problem with PIK bonds for the issuer is the fact that it becomes tempting to pay coupons with more debt rather than cash when the company has a liquidity problem. Of course, doing this often only adds to the issuer's liquidity problems. This type of bond was not unusual during the private equity boom in the mid-2000s, but became rare during the credit crunch at the end of the decade.
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It is clear to us that the previous financial structure was unsustainable - one does not need a doctorate from Oxbridge to realise that 17% PIK bonds are prone to collapse in a highly-cyclical business such as retail," it said.
Until recently, issuers of PIK bonds were allowed to deduct coupon payments on the additional debt as an interest expense, even though no cash outlay was made.
The major grandfather exceptions are for (i) obligations to issue PIK bonds, (ii) refinancings, (iii) binding contracts, and (iv) convertible preferred stock.
An event of default has occurred and is continuing whereby the sum of the principal balances of all non-defaulted/deferred interest PIK securities, the calculation amount of all defaulted/deferred interest PIK bonds and the total amount of cash and eligible investments on deposit in the principal collection account is not at least equal to the outstanding amount of rated notes.
All OC test calculations net out a percentage of defaulted and written down securities and deferred interest PIK bonds, as well as a percentage of assets rated below investment grade that exceed certain covenanted amounts.