Some of the most controversial financing practices of the credit-bubble years – from “cov lite” loans to “Pik toggle” notes and “dividend recap” exercises – have returned to Wall Street, stoking fears that debt markets are growing overheated.
The techniques fell into disrepute during the financial crisis because they were based to varying degrees on the same rosy expectations that encouraged companies and consumers to assume what proved to be crippling levels of debt.
In a cov light – short for covenant light – loan, borrowers are granted credit with few, if any, conditions. Pik-toggle transactions make it possible for debt to be repaid with more debt – “payment-in-kind” notes. In a dividend recap, companies take on additional debt to pay dividends to their owners.