PIK Toggle Bonds Explained

PIK (pay in kind) toggle bonds permit a bond issuer to unilaterally decide to pay one or more of its interest payments in cash or additional bonds.

This feature enables a bond issuer to avoid a payment default if it is unable to pay interest in cash when due.

Because many bonds have few other covenants which would trigger default and bring a bond issuer “to the table” to work with bondholders to restructure the credit arrangement, a PIK toggle bond may deteriorate more before an event of default occurs, reducing the recovery amount.

PIK toggle bonds typically offer investors a higher interest to compensate for the greater risk involved.

PIK toggle bonds, which were common before the financial meltdown of ’08/’09, have now become common again.

I’ve provided links to several helpful articles below:

Practical Law Definition:  http://us.practicallaw.com/7-382-3690

Zero Hedge Blog: http://www.zerohedge.com/news/2013-09-28/its-pik-toggle-credit-bubble-time-its-different-says-moodys

Barrons Blog: http://blogs.barrons.com/incomeinvesting/2012/10/23/citi-pik-toggle-bonds-dont-signal-end-of-the-world-for-high-yield/

Wall Street Journal Article: http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-361349/