PIK notes – useful or just trouble for the future May 16, 2009
Posted by nicolatillin in Buyouts.Tags: Kimberly Romaine, PIK notes, private equity, restructuring, unquote"
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PIK notes seem to be making something of a return to the private equity landscape but opinion is divided to whether they represent a disaster waiting to happen, or are a genuinely useful tool considering the current need to come up with workable restructuring solutions.
On the face of it, PIK notes seem to be an attractive option, allowing preservation of cashflow by offsetting interest repayments by issuing notes. However there is strong evidence to show that PIK notes issued in the past are coming back to bite people.
A recent article in unquote“, written by Editor-In-Chief, Kimberly Romaine, outlined the case study of Four Seasons, the UK care home group. Bought back in 06 by the Qatar Investment Authority for £1.4bn, it looked the perfect deal structure but if we looked at the same structure now, things would appear very differently – around £83m of PIK was placed between the mezz tranche and the sponsor – with the PIK at 20% interest.
With Four Seasons having a technical breach and the business currently valued at less than half of the original valuation, a debt for equity swap looks a likely outcome. The unquote” article indicates that the deadline for an agreement was due at the beginning of May, with creditors threatening to take over assets.
It would be interesting to hear what other people think about PIK – a useful instrument in exceptional circumstances or just a way of papering over cracks – cracks which will just become wider and deeper with time.
