Payment-In-Kind Bonds Tied to Higher Default Rates, Moody’s Says

Companies that issued so-called payment-in-kind bonds defaulted more often last year than businesses with comparable ratings that sold debt that paid coupons in cash, suggesting they had riskier capital structures, said Moody’s Investors Service.

Their default rate of 30 percent exceeded the 17 percent for companies with similar credit profiles, according to a Moody’s report published today that studied 62 issuers of notes from 2006 through 2008. Payment-in-kind bonds allow companies to add additional debt to the amount due on their notes rather than making periodic interest payments in cash.