Fancy footwork from more private equity funds

November 19, 2008 | By Jim Kim

We noted recently that private equity firm Apollo has been among the most active beneficiaries of PIK toggle features in bond issues. Which basically allow portfolio companies to pay interest with more debt. The Financial Times reports that Apollo is also benefiting from so-called "accordion features" that were built into some deals. Basically, the feature allows portfolio companies to issue more debt in a way the relegates senior holders to more junior positions. If you want to maintain a senior claim, you would have to accept a haircut on the value of the bonds. Apollo-owned Realogy, for example, gave bondholders a choice: A low priority claim at full value or a more senior claims at only 50 cents on the dollar. This certainly reflects the fancy footwork that some private equity firms have been forced into. It will get worse before it gets better.

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