Payment-In-Kind Bonds

Categories: Stocks, Bonds

See: Payment-In-Kind - PIK.

Dividends sometimes get paid this way...dividends on stocks or equities. When a bond offers PIK interest, it means that the company has the right to pay its lenders with its own shares of stock instead of cash.

The move to do that sends a strange message. It says equity is worth less than the cash interest payable on the bonds. Maybe that's ok, maybe it's not. But having the flexibility to pay debts that way is maybe...good (for the borrowers).

Related or Semi-related Video

Finance: What is Payment in Kind/PIK?44 Views

00:00

Finance allah shmoop what is payment in kind or a

00:06

pick All right so you know what a normal vanilla

00:10

dividend is right A company is so profitable it can't

00:14

think of anything else to do with its excess cash

00:16

so it just gives it back to its shareholders a

00:19

really nice gig if you can get it The company's

00:21

stock trading a twenty bucks a share pays twenty cents

00:24

a quarter in dividends or eighty cents a year and

00:27

well that yields four percent Got it that's eighty cents

00:30

over twenty bucks Simple vanilla dividend Will companies also often

00:36

carry debt The company whatever dot com has fifty million

00:39

dollars in debt which cost them six percent a year

00:42

or three million dollars a year to pay the interest

00:44

to rent that money when times were good the company

00:47

pays the interest in cash but dividends and interest payments

00:50

aren't necessarily always paid in cash They can be paid

00:55

in stock as well And yes this is weird Why

00:58

would a company pay a dividend or bond interest in

01:01

its own stock that would dilute the equity ownership of

01:05

the company So why would they do it Because they

01:07

had teo some companies will have offered bonds which give

01:11

the company the option of saying that interest either in

01:14

stock or in cash and company thinks it is in

01:18

jeopardy of potentially going bankrupt Well it will pay its

01:21

interest obligations in stock instead and this is generally a

01:25

very bad thing for equity holders and the bondholders I'm

01:28

so happy about it either because they don't know what

01:31

that stockton worth bond people are meeting potatoes kind of

01:33

people and they just like cats Thank you very much

01:36

So what does that communicate to the shareholders Well it

01:38

communicates that the company's management at least thinks it's equity

01:42

is overvalued so the company is choosing to dilute equity

01:47

holders by using its equity or stock as a currency

01:51

instead of cash and even worse the company might be

01:54

communicating well that it's cash obligations are so tight it

01:58

is so fearful of the b word that they have

02:02

to pay in stock or they might go bankrupt So

02:04

kind of armageddon ish scenario There cos will also pay

02:08

dividends in stock at times for largely the same reasons

02:11

but with different dilution dynamics Because in the case of

02:14

the equity owners of the company and people who own

02:17

their common shares all receiving you know pro ratted dividends

02:21

or equally the same number of incremental shares as dividend

02:25

meaning that the company is yes diluting itself but doing

02:29

so equally to basically everyone who is a common shareholder

02:32

So who does this screw in the process Option holders

02:36

Yeah employees usually like if they only own options they're

02:40

not entitled to dividends whether in cash or stock while

02:44

they get diluted away for there hard nonunion efforts Yeah

02:48

well this is called pick or payment in kind although

02:52

to those screwed over option holders there's a you know 00:02:55.183 --> [endTime] not much kind innit

Find other enlightening terms in Shmoop Finance Genius Bar(f)