The covenant-lite and PIK-toggle era may be gone but the creative debt structures still have their supporters.
Partly credited for keeping the default rate low by lowering the threshold for companies to go belly-up, the terms refer to the loose conditions agreed during the buyout boom when funding was readily available.
At a conference on Wednesday organized by The Deal, Blackstone’s COO Tony James volunteered a spirited defence of the structures, when questioned about his views on the current low default rate.
“”I can’t resist, since you opened that up,” James told Deal reporter David Carey, “by saying that this is why covenant lite, pik-toggles, those kinds of things which people look at as aberrations (are good)… I believe that those kinds of structures are in everyone’s interests and the economy’s interests. ”
Private equity benefits, he said, because the company is more able to survive; while by keeping the company intact, creditors and customers are kept from fleeing.
Trackback
3 comments so far
[…] and PIK-toggle era may be gone but the creative debt structures still have their supporters,” reports Reuters’s DealZone
- Posted by Deal Journal - WSJ.com : Afternoon Reading: What CBS Sees in CNETThere is nothing good about bankruptcy…people get fired, banks lose money, suppliers/landlords lose money, investors lose money. Cov-lites could buy some time but covenants are in place to make sure that the banks don’t lose as much as they otherwise would if they rode the company to the ground instead of taking the reins before it flames out.
Covenants for banks are like jumping out of a crashing plane with a parachute before it hits the ground. There are bolder pilots out there that might try to land the plane, but that gambit only works some of the time.
- Posted by OverboughtCovenant-lite and PIK toggle were invented merely to accomodate the dramatic over-leveraging of companies. If they help out right now, then fine. I’m not sure that they will be enough if the recession is long lasting. Ultimately if EBITDA erosion is steep enough, companies will find that the rather skimpy working capital facilities that went along with this deal structuring will become tapped out. Running out of cash altogether may be the final day of reckoning for some of these companies. These terms are the “roids” of the financial world, the toxic enablers, and should be shunned in the next recovery.
- Posted by Gail Long