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“Stock PIKs”- Taking a firm by its tails

Author

Listed:
  • Karan Bhanot

    (The University of Texas at San Antonio)

  • Antonio S. Mello

    (Imperial College Business School, Imperial College London)

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.

Suggested Citation

  • Karan Bhanot & Antonio S. Mello, 2009. "“Stock PIKs”- Taking a firm by its tails," Working Papers 0072, College of Business, University of Texas at San Antonio.
    • Handle: RePEc:tsa:wpaper:00117fin
    as

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    File URL: http://interim.business.utsa.edu/wps/fin/0072FIN-073-2009.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Stock Market; Economic Development;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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