Often it is held by the holding company and so does not even benefit from operating cash flows, and so provides even less security in the event of difficulties with the issuer.
One example of use of PIK notes was the financial structuring put in place by JPMorgan to allow Malcolm Glazer to control Britain’s best known football club, Manchester United, in June 2005. It included a PIK note paying about 18%, which, analysts say, could have been an own goal if Manchester United’s great footballing track record had faltered when it was in place.
The hedge funds that bought the note were satisfied, however, that unpleasant results – like Man Utd not qualifying for the Champions League with a corresponding loss of earnings – were unlikely. In the end, they were saved from this penalty.
Investors have been happy to hold PIKs while yield is their goal rather than liquidity, and the PIK could potentially move on to real estate deals, says Oliver Khayat, global co-head of capital raising and financing at SG CIB. “Yields of PIK notes are impressive but it’s important to understand the risks,” he says. “If the market turns, PIK notes behave like equity but when it improves, they only behave like debt.”
