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Credit Insights

Dividends, Buyouts, and PIKs, Oh My!

Risky transactions in the corporate bond market are staging a comeback.

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Maybe these aren't exactly the same risks that Dorothy imagined on the yellow brick road, but the riskiest types of transactions in the corporate bond market are staging a comeback as investors continue to reach for yield.

While the credit market isn't quite back to the craziness it experienced back in early 2007, we are seeing more indications of the type of peak-market transactions that will be indicative of the next corporate credit bubble. Over the past few months, we have witnessed an increase in leveraged buyout financing, issuers raising debt to pay cash dividends to their private equity owners, and more recently issuing what are known as PIK toggle notes. While investors typically pick up some additional yield in the short term, which is attractive in a bull market, it comes at a price, as these are the same securities that will trade down first when sentiment turns.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.