Not Again

February 13, 2020
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Strange actions are afoot again in the bond market.

Per Barron’s:

Case in point: the return of particularly speculative paper called payment-in-kind, or PIK, securities. Instead of paying interest in cash, the borrower simply issues more debt to the investor. During the crazy days of the mortgage bubble that led to the financial crisis, home buyers would take on interest-only mortgages to get into houses they couldn’t afford. With PIK securities, corporate issuers don’t even have to pay interest; they just issue more paper, effectively going deeper into hock.

Husky III, a holding company for Husky Injection Molding Systems, a machinery supplier backed by private-equity sponsor Platinum Equity, plans to issue $450 million in five-year PIK bonds. What’s the attraction of the securities, rated CCC by Standard & Poor’s and an equivalent Caa2 by Moody’s Investors? The yield being talked about in the market is 12%, more than twice the 5% or so offered on exchange-traded funds such as iShares iBoxx $ High Yield Corporate Bond (HYG) or SPDR Bloomberg Barclays High Yield (JNK). Proceeds from the financing will pay a dividend to the private-equity backers of Husky, which they purchased in 2018 for $3.9 billion.

Such deals, in which backers extract their equity, weren’t uncommon in 2005-07, before the financial crisis, notes Cliff Noreen, head of global investment strategy at MassMutual. The big insurer is a major investor in corporate credit, with $567 billion under management. The return of PIKs reflects investors’ hunger for yield in today’s low interest-rate environment, which includes negative yields abroad.

Buyer Beware What Wall Street Is Selling

Stay Tuned, Disciplined & Patient! {TJM}

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