“Stock PIKs”- Taking a firm by its tails

Karan Bhanot and Antonio Mello
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Karan Bhanot: The University of Texas at San Antonio
Antonio Mello: Imperial College Business School, Imperial College London

No 72, Working Papers from College of Business, University of Texas at San Antonio

Abstract: Payment-in-kind bonds (PIKs) make interest payments in the form of an issue of additional bonds rather than cash. This research provides a rationale for the recent PIK issuance by firms with low credit ratings. PIKs offer a financially constrained firm in need of restructuring both an immediate automatic stay and a prepackaged bankruptcy procedure, features that make PIKs better than alternative debt instruments. In many instances PIKs are structured to facilitate a contingent transfer of control to PIK holders, and provide an avenue of obtaining equity in the firm whether the firm value is high or low in the future. The barbell strategy of acquisition that involves a deal with the equity holders (if the firm prospects improve), and a deal with the debt holders (if the firm defaults) dominates the cost of acquisition before the firm defaults, or after the firm goes bankrupt.

Keywords: Monetary Policy; Stock Market; Economic Development (search for similar items in EconPapers)
JEL-codes: G13 G33 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2009-03-15
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