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Smells LIke 2007 - PIK Toggle New Issues Collapse 1 Day After Issuance

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Last Friday we warned that the massive ramp in PIK Toggle new issues so far in 2016 was eerily similar to a spike witnessed in 2007 which, in hindsight, was a solid indicator of the "beginning of the end" for the high-yield market. In 2007, the massive ramp in PIK Toggle new issues was driven by private equity firms rushing to take money off the table via massive, debt-funded dividend recaps. And now, 9 years later we see a similar spike in PIK Toggle issuance driven by a voracious "search for yield" by the world's largest pension funds and insurance companies.


But while the underlying cause of the two high-yield bubbles are different we fear the ultimate outcome will be the same. In fact, we're seeing the first signs that the 2016 edition of the high-yield, PIK Toggle bubble might be bursting with two new issues collapsing just 1 day after breaking for trading.


Luxembourg-based packaging company, Ardagh Group, issued €845mm of 6 5/8 PIK Toggle Notes of 2023 last week that crashed to below 96 in early trading today...






Meanwhile, German auto parts supplier, Schaeffler, issued €750mm of 3 3/4 PIK Toggle Notes of 2026 that dipped below 97 in early trading.






According to Bloomberg, both of these PIK Toggle issuances were oversubscribed last week prompting the companies to increase deal sizing. And now, 1 day after yelling at bond salesmen for their poor new issue allocations, angry portfolio managers around the globe are rushing for the exits. Sound familiar to anyone?





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