Payment-in-kind toggle debt, always a mouthful, is becoming harder to swallow. It was popular in leveraged buy-outs as it gave borrowers the option to delay cash coupons and pay with additional paper in tough times. But for lenders this is tantamount to extending more credit even as default risk is rising. The danger is this merely delays the inevitable, with liabilities mounting and assets depreciating, leading to low recovery rates when bankruptcy strikes.

Sampling 41 Pik-toggle issues, Standard & Poor’s expects a median recovery rate of 10 cents or less on the dollar. Seven issuers are either already spewing more paper back to creditors or are soon to do so. Moreover, three of these seven Pik issues – and a fifth of the overall sample – were timed around debt- financed special dividends that helpfully provided private equity holders with the money to recoup part of their original investment. For the lenders involved, that must really stick in the throat.