[A-List] The coming savage downturn

["Michael Keaney" <michael011@xxxxxxxxxxx>]

Henry wrote:

CDOs routinely issue controversial features such as payment in kind
(PIK) in order to sustain promised cash flow. A PIK term stipulates that
in the event that investors cannot be paid current monthly interest they
are promised an increase in the par value of the bond to be paid at
maturity.  It is an IOU in payment for 
an IOU.

*****

LAST TO BE REPAID IN A BANKRUPTCY, PIKS OFFER THE KIND OF HIGH RETURNS
THAT ARE ATTRACTIVE TO HEDGE FUNDS
By Louisa Mitchell and Gillian Tett
Financial Times: June 28 2006

PIKs are payment in kind notes, or loans that allow an issuer to delay
interest and capital repayment, sometimes for several years.

They are the last debts to be repaid in the event of bankruptcy because
they come after other debt instruments and only just before equity in a
company's capital structure.

To compensate investors, or lenders, for this risk, PIKs usually offer
high returns, such as 10-20 per cent per year.

This makes them attractive to hedge funds, which are keen to buy
high-yielding instruments.

See http://lists.econ.utah.edu/pipermail/a-list/2006-June/061422.html


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