The number of private equity-backed companies that are choosing to pay interest on their debt with more debt, known as payment-in-kind, has increased in the last four months and will continue to rise in the challenging economic environment.
A report from Moody's Corporate Finance identified 11 private equity-backed companies that have either exercised, or announced their intention to exercise, their PIK option this year. Standard and Poor’s identified five firms in June.
PIK notes, widely issued between 2005 and 2007, allow a company to make interest payments in debt rather than cash. Companies choose to pay in kind to conserve cash, put cash toward capital expenditures or growth investments rather than interest or because negative cash flow has left them with no other choice.
Four of the companies identified by Moody’s – Apollo Global Management-backed Realogy and Claire’s Stores, and Welsh Carson Anderson & Stowe's US Oncology Holdings and TH Lee and Fenway Partners-backed Simmons Holdco, were forced to use their payment-in-kind option because of negative cash flow.
“The PIK election often indicates a deterioration of an issuer’s intrinsic credit strength, usually manifested in a reduction in actual or anticipated liquidity,” Moody's said.
Apollo backs four of the other companies identified by Moody’s: Berry Plastics Group, Harrah’s Operating Company, Metals USA and Momentive Performance Materials.
Other companies include Laureate Education, which is backed by a consortium including Kohlberg Kravis Roberts and Citi Private Equity, Crestview Partners-backed Symbion and Avista Capital Partners’ WideOpenWest Finance.
Univision, taken private in 2006 by Madison Dearborn Partners, Providence Equity Partners, TPG, Thomas H Lee and Saban Capital Group, may switch to PIK in the near future due to the terms of its revolving credit facility, Moody’s said.