Companies Paying Bond-Holders "In Kind"
During the buy-out boom, Standard & Poor’s Leveraged Commentary & Data estimates 43 bond deals were done with a PIK feature. Some analysts suspect, however, that the actual number was higher.And now some of those companies are turning the concept into practice. This should be pretty damn disturbing to people who lend money to corporations. It's a credit crisis of a different kind.
In the past, when times were flush (at least on paper), companies often did not want to dilute ownership and its control and value. But what happens when a company can say, "Oh, that money we owed you? Here's another bond to make up for it." The bonds then effectively become IOUs, and when you expect to get cash, instead there is more paper. Companies may avoid default, but to what end? This turns credit ratings on their head, since, I'd argue, this lets borrowers effectively walk away from obligations in a legal manner. If compaies can, then often they will - and if they do, then the credit ratings that attempted to quantify how safe an investment was become meaningless.