The issuance of holdco pay-in-kind (PIK) notes in Europe's leveraged finance market, for purposes other than shareholder payouts, has been increasing rapidly. While most market participants believe this growth is just another expression of unbridled European enthusiasm, they also expect PIK issuance - to fund LBOs and refinance junior debt instruments - to continue at a fast rate in the medium- to-long-term, thereby drawing interest from a broader range of investors.

The appetite for PIK notes is strong because of the higher yield they offer, although the bulk of the investor base for these instruments is still made up of the more recent buyers of European leveraged assets, namely hedge funds, that view PIKs as a bridge to an exit strategy such as an IPO or a refinancing. Along with high-yield investors, some private equity houses have also been buying PIKs, and now there are signs that collateralized debt obligations (CDOs) are increasing the size of their junior debt baskets in order to boost their overall returns, and possibly invest in PIKs in the process, said Michelle De Angelis, senior director in Fitch Ratings' London-based leveraged finance team.

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