Bonds: Risk is back!

@CNNMoneyInvest March 14, 2012: 12:51 PM ET

NEW YORK (CNNMoney) -- The risky bond deals that were a hallmark of the pre-financial crisis boom are staging a comeback as investors continue to hunt for ways to find higher rates of return.

And companies are willing to meet the demand. Roughly $58 billion of high yield, or junk, bonds have been issued by 95 corporations since January. That's the fastest start in 15 years, according to Dealogic.

Investment grade bonds, which offer a lower, albeit more stable yield, have also continued to attract investor interest. Since January, about $150 billion of corporate bonds have been issued by 315 companies, according to Dealogic. While that's slightly faster than the past two years, it's well behind the pace set in 2007, 2008 and 2009.

But what's really captivating market watchers is the reemergence of a particular bond that has a so-called 'toggle pay-in-kind', or PIK, structure that allows a company sell new bonds rather than make semiannual payments to creditors.

Analysts and traders see these bonds as the first clear sign of a return to the pre-crisis era of financing.

Last week, Goldman Sachs' (GS, Fortune 500) private equity firm GS Capital Partners and Advent International issued $600 million in toggle PIK bonds with a 9.625% coupon to help finance their $3 billion buyout of TransUnion, the third-largest credit reporting company behind Experian and Equifax (EFX).

Meredith Whitney was right

The "toggle PIK" structure gives TransUnion the option to issue more debt instead of doling out $29 million in semiannual cash payments to debt holders.

"This deal got everyone's attention because it showed that there really is an appetite for these risky securities," said Richard Farley, a corporate partner at Paul Hastings.

TransUnion, Goldman Sachs, and Advent International declined to comment on why they chose this financing structure.

Because of the success of the TransUnion deal, several sources said deals with this type of financing are in the pipeline and could be announced in the next several weeks.

In theory, this structure should give a company like TransUnion more options should it run into trouble. If it sees a decrease in cash flow for a few quarters, it can issue more bonds and conserve cash.

In practice, however, companies with toggle PIK bonds have been more likely to wind up in bankruptcy. Between 2006 and 2010, companies with toggle PIK bonds defaulted at nearly twice the rate of companies with similar amounts of debt, according to Moody's.

One trader called the reemergence of the toggle PIK bonds the first sign of "financial promiscuity" coming back to the bond market.

Farley says the PIK bonds and several other trends he's seeing in the high-yield market are functions of a hot market where investors are aggressively seeking yield again.

Among other signs of an aggressive lending market is talk of more high-yield deals that contain few covenants, or ways for bondholders to force companies to take certain actions.

Meanwhile, private equity firms are also issuing more debt to give themselves dividend payments.

One of the more high profile recent deals is Chicago private equity firm GTCR's marketing of a new $545 million loan for Protection One, a home alarm system company that GTCR bought for $828 million in late 2010.

The loan is expected to give GTCR a healthy cash dividend. Protection One and GTCR did not immediately respond to requests for comment.

Should this trend continue, industry watchers say private equity firms will continue to add debt to their companies to reap the dividend rewards.  To top of page

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