BMC software borrowed $750 million via one of the riskiest forms of debt, payment-in-kind (PIK) notes, where, if push comes to shove, BMC can chose to pay interest not with cash but with more of the same debt.
The amount it owes gets larger, as its chances of survival shrivel. Instead of defaulting, the company will simply hand the lender more paper that’s increasingly worthless.BMC promptly forwarded the $750 million to its owners, a group of PE firms let by Bain Capital that had acquired BMC only seven months earlier.
Time is of the essence. Platinum Equity, which had acquired Volvo’s rental car division, waited only a week after closing the deal before sucking $262 million out that the company had obtained by issuing PIK debt.
So far this year, these already overleveraged companies have issued nearly $21 billion in junk-rated debt for the purpose of paying special dividends to the PE firms that own them — the most since the bubble of 2007, before it all blew up spectacularly.Of that, $3.5 billion were these reeking PIK notes.When a default occurs, the PE firms have the cash, and the lenders get stuck with largely worthless paper.