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Capital markets: Hungry high-yield investors drive issuers to think about toggles

"Actually, I just pitched one of those today," says a debt capital markets banker when asked whether he detected developing interest among emerging market clients in toggle notes.

Deals involving the structure, whereby issuers may deliver either payment-in-kind (PIK) notes or cash to their investors, have so far been relatively thin on the ground but strong demand for high-yielding paper has driven the cost of toggle notes down to a level that could prove extremely attractive.

The notes are more expensive than straight debt for the issuer, with market consensus suggesting that the extra flexibility of delivering cash or PIK option is worth around 25 basis points.

At the end of February Digicel Group, a holding company owned by Irish billionaire Denis O’Brien, became the first emerging markets company to issue toggle notes. The firm sold $400 million of toggle notes alongside $1 billion of straight debt as O’Brien sought to complete the buyout of Digicel Ltd, a Caribbean telecom company in which he owned 78% of the shares.


Blake Haider, director of Latin and Caribbean debt at joint lead manager Citi, says: "$400 million was an unprecedented amount of toggle notes for an emerging markets deal although of course Digicel is an extremely savvy issuer with a rapidly growing business. With this transaction, they were looking at a business that was growing very rapidly in the Caribbean and they wanted to preserve as much capital as possible, which is something that the flexibility of the toggle note allows.

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