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Fitch: Favorable Market Conditions Drive Surge in U.S. PIK Debt Issuance

January 21, 2014

NEW YORK --(BUSINESS WIRE)-- Last year set a record for the number of U.S. payment-in-kind (PIK) debt issues and 2013 was the third-highest in terms of issuance volumes since 2005, driven by dividend payouts to private equity sponsors and debt refinancing, according to a Fitch Ratings report. U.S. PIK issuance totaled $14.8 billion in 2013, surpassed only by levels in 2007 and 2008. In total, there were 36 PIK notes issued in 2013. Despite the resurgence in volumes, Fitch notes that PIK debt remains a both a niche and relatively expensive product for deeply speculative-grade issuers. PIK notes accounted for less than 5% of the $315 billion of U.S. high-yield debt issued last year. The average interest rates on PIK debt issues completed over the past eight years was approximately 10.5% cash and 11% in kind, (averages include issues that have a combination coupon with PIK and cash components and therefore an equal cash-pay and PIK coupon). The proceeds from many of the 2013 deals were used to fund dividend payouts to enable private equity owners to cash out of a portion of their holdings or to refinance existing debt and extend maturities. Recent PIK transactions have been structured more conservatively than pre-crisis issues, with inclusion of contingent cash-pay features and less flexibility to pay in kind. Fitch analyzed the form of coupon payment (cash or kind) for 119 issues and found moderate reliance on in-kind payments: 41% of issuers made all coupon payments to date in cash, 29% made all payments in kind, and the remaining issues had a payment history of both cash and in-kind payments. Fitch's analysis found that post-crisis PIK issuers were less leveraged one year after their PIK debt issuance dates than pre-crisis PIK issuers. Fitch calculated median debt leverage ratios of 7.2x for a group of 20 post-crisis issuers versus 9.4x for a 25-member pre-crisis group based on LTM periods following the PIK issuance dates. Similarly, the post-crisis group posted stronger median FFO interest coverage of 1.6x compared to 1.4x in the pre-crisis era. The full report 'Payment-in-Kind' (PIK) Debt: U.S. Market, Credit and Payment Trends' is available at ' ' or by clicking on the link. Additional information is available at ' '. Applicable Criteria and Related Research : Payment-In-Kind (PIK) Debt (U.S. Market, Credit and Payment Trends) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS . IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE ' WWW.FITCHRATINGS.COM '. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Ratings Sharon Bonelli , +1 212-908-0581 Managing Director Fitch Ratings, Inc. 33 Whitehall New York, NY 10001 or Media Relations: Brian Bertsch , +1 212-908-0549 Source: Fitch Ratings

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