Moody’s warns about return of risky debt notes

 
Michael Bow
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RATING agency Moody’s yesterday said a resurgence in weak companies issuing controversial credit notes, made popular in boom-era deals, threatens to drive up risk in the financial system this year.

Payment-in-kind (PIK) notes – an aggressive type of loan which pays interest in more debt rather than cash – doubled in issuance last year to $4.5bn having disappeared altogether in the aftermath of the financial crisis.

Analysts predict companies with weaker credit ratings will begin tapping markets more this year – raising the risk to investors and jeopardising the credit rating of the issuing company.

“The current wave of PIK issuance has been mainly from companies which have a stable operating performance, with investors not taking up weaker companies’ PIK notes,” analyst Tobias Wagner said.

“This resistance will be tested in 2014, as investors seek yield in an environment where weaker new companies are also successfully issuing bonds.”

The notes are often used by private equity firms to help acquire companies. Moody’s said Pay-if-you-can PIK also threaten liquidity.