Private Credit Deep Dives – PIK Toggles

At the start of June 2022, the prevailing rate for the sterling overnight index average (SONIA) was 0.94%. Just 12 months later, SONIA has risen to 4.43%, and comparable increases in the equivalent reference rates have been seen both in the US and in the Eurozone. This has represented the fastest ramp-up in interest rates since at least the 1980s, and on an absolute basis has pushed rates to their highest level since the Great Financial Crisis. For borrowers of floating rate debt, of which the loan market is the largest constituent part, this has meant a dramatic increase in the cost of debt service. For a borrower of a unitranche loan priced with a 7.00% margin over SONIA, for example, the overall interest burden during the aforementioned period would have increased by 44%. In highly leveraged capital structures (which became increasingly common over the preceding decade, due to the persistently low cost of debt), this has put very considerable pressure on cashflows