Hot market greets ‘super PIK’ bonds sold by Irish billionaire

One of Ireland’s richest entrepreneurs has embraced an aggressive new version of an already esoteric form of junk bond, highlighting the level of risk that debt investors are willing to tolerate as they seek higher yields in hot credit markets.

The $350m “super PIK,” or payment-in-kind bond, raised at the end of last week will pay a dividend to a group of shareholders in Ardagh Group, a one-time small Irish glass bottle maker that has grown in the past two decades into one of the world’s largest metal and glass packaging companies.

PIK refers to bonds or loans that can pay their interest with further debt rather than cash. This means the size of the debt can balloon quickly and leave lenders with steep losses if the underlying company is not able to handle the growing burden.

While Ardagh listed on the New York Stock Exchange last year, 92 per cent of its shares are held privately, with its billionaire founder and chairman Paul Coulson the largest shareholder. It is these private shareholders that are receiving the dividend.

“In plain terms, the use of proceeds is essentially providing a ‘margin loan’ to legacy shareholders,” noted analysts at credit research firm CreditSights.

The majority of PIK bonds sold in recent years have been “PIK toggles”, a slightly less risky format that pays interest in cash if possible and only “toggles” to a payment-in-kind if there is not enough cash available.

A holding company above Ardagh already has about €1.5bn-equivalent of such PIK toggle notes. But the new $350m PIK bond was raised at a new holding company above this, meaning the debt would be paid behind the existing PIK toggle notes in a default or debt restructuring.

The CreditSights analysts called the structure a “SuperHoldCo PIK note”, while several investors have dubbed it more simply a “super PIK”.

“It’s definitely a sign of where we are in the cycle right now,” said a manager at a US credit hedge fund. “I’ve never seen a ‘super PIK’ before.”

Ardagh declined to comment.

Despite its risky structure, the PIK bond sale drew roughly $2.5bn of orders, said a person close to the deal. This allowed it to ultimately price with a yield of 8.75 per cent, below the 10 per cent initially marketed. An older PIK dollar-denominated deal sold by the company in 2017 currently trades with a yield of 6 per cent.

Investors were willing to take the risk as Ardagh has a long history of generating cash to service its debt. Mr Coulson has built the company up through debt-funded acquisitions and is no stranger to the PIK debt market, with Ardagh having raised such bonds as far back as 2005.

A London high-yield bond fund manager said the latest deal was only made possible by Ardagh’s IPO in March 2017.

“They’ve looked into raising heavily subordinated margin loan debt before, but the difference is now they’ve got a public market cap they can point to,” he said.

“You’ll see plenty of [other] aggressive PIK deals this year, but not in this form,” he added.