A relatively new instrument for the European market is gaining steam, even as the high risks associated with it should be clouding the hopes of investors looking for sunny returns. The so-called “payment in kind” notes, or PIKs, debuted in Europe just 18 months ago, and hedge fund investors have taken a strong liking to them, picking up some $3.8 billion in PIKs in the second quarter alone. Issued by private equity-backed companies, they offer high interest though they don’t repay for several years, and they are deeply subordinated, which doesn’t bode well for investors should the company fail. Despite the risks, though, hedge funds are still hot for them. “Everyone is still buying and that just allows people to keep pushing the limits,” Edward Eyermann of Fitch told Financial Times, who added that there has been “some pushback on pricing in the U.S.,” but not in Europe. What should be scaring hedge funds at this point is that despite the rising issuance of PIKS, a wave of bankruptcies is expected to flood Europe, which means hedge funds could lose a pretty penny. The FT says a telltale sign is the fact that many banks are currently beefing up their restructuring teams. Still, hedge funds say they are confident companies will be able to repay their debt.
