When looking at prices for PIK notes that are distressed, and the prices are clean, is it guaranteed that the buyer always pays the full dirty price including all accrued interest?
For example, say a bond was originally issued at $100 but has accrued $20 via PIK interest. I see a price on Bloomberg marked as a 'clean' price at 70. Should I automatically assume that the buyer paid $90 (70% of issued + $20 accrued) for the dirty price?
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Interested in someone more knowledgeable's answer. However, based on your example, may be a tough assumption to make off of a quick bloomberg scan. To get you're answer, would venture to guess you'll have to pull up the facilities credit agreement and read through how PIK interest is treated in the event of a default.
From my experience, I've seen PIK interest accrual accelerate after certain coverage ratio tests are tripped (not necessarily default) so in your example PIK accrual could actually be higher than the $20. Again, not a distressed debt authority, so defer to commentators more knowledgeable.
Bonds do not trade with accrued PIK interest-ie you pay/get paid for the accrued cash portion of the coupon if any, but NOT the PIK portion (toggle situations depends on what the company has stated about its intentions/ability to pay), so the clean bond prices does NOT include any payment for the PIK.
Two other points to note: a) In bankruptcy your claim includes accrued cash AND PIK interest, even though you didn't pay for the accrued PIK. This is part why pari passu bonds of defaulted companies can trade at different prices (which continue to be expressed as a % of face) (The other relates to situations where you may receive default interest/makewholes etc).
b) Oftentimes distressed bonds trade "clean" or "without" [accrued] on the cash portion as well if there's risk of the company not making its next coupon payment. There's no set rules on this that I'm aware of (though if a company has announced it will not be paying its next coupon this is usually a trigger).
Excellent response. I really appreciate the help. So basically typically when settling a PIK bond, the actual price paid would only be different than the clean price if the note has a cash coupon that has accrued, which would be the dirty price?
Bloomberg quotes suck. There is no set convention, and the market maker likely pulled those numbers out of their asses. The quotes are likely not real anyway.
You will have to contact the market maker to find the quote convention & where they will actually consider making you a market.
With that said, if the company already filed its 99% of the time trading on principal only.
PIKs trade flat. What you see as the price is what you pay.
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