Trading price for distressed debt after a PIK event
Hi All, Question around how a PIK capitalization will impact the trading price of a distressed security. In most cases I would assume it will trade down due to distressed nature & fact no cash actually exchanged, market will not attribute additional value to the capitalised amount. As a example:
Notional: 1,000,000
Current Mark / price: 70c
MV: 700,000
PIK Capitalised: 100,000
New Notional: 1,100,000
Implied MV at 70c: 770,000
Rather than recognizing the 70k gain I would assume this would trade down to maintain a constant MV of 700K, therefore would trade at ~64c? Only if there were signs of a potential recovery would it begin to attribute additional value to that capitalized amount?
Thanks!
I would think this depends on whether there were other pari securities as well. If you are expanding your portion of the pie, your value should theoretically go up.
For example you have an unsecured security valued at 100, as a part of 200 of total unsecured value. PIK of 10 on the 100, makes it so you now have 110 of 210 (52.3%) rather than 100 of 200 (50%) of that tranche. If no value changes, you still get an uplift.
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