Bonds: Last gasp before the August calm

Part 5

Fixed income issuers acting aggressively and raising worries

More PIK bonds signal issuer aggressiveness

An additional three PIK bonds (pay-in-kind bonds, which give the issuer the option to either pay a cash coupon or accrue it to its principal) priced last week, totaling eight in three weeks and amounting $5 billion.

HYG vs JNK 2013-08-14Enlarge Graph

PIK bonds are relevant mainly because they’re usually issued by lower-rated, potentially cash flow–constrained issuers with lower ratings. In many cases, these bonds are issued at the holding company level, which makes its payments junior in priority versus the payments of debt at the subsidiary level.

Record week signals the end may be close

This is the highest three week issuance on record. The year-to-date issuance (19 PIK bonds) is also the second most on record since 31 PIK bonds were issued in 2007.

Another record with respect to these bonds is that year-to-date, $6.5 billion in dividends have been funded via PIK bonds. This is an all-time record.

Generally record-setting aggressive issuance signals the end of a bull rally. We’re likely close to the point where issuers will start to push back and push yields higher and so bond prices (HYG) lower.

Read on to see how the leveraged loan market has behaved recently.

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