According to a Reuters report, many private equity firms are paying themselves as well as their investors through European firms they already own. This is conducted through debt issuances in volumes that is not seen since the 2008 financial crisis.
While this is common practice when the economy is healthy, as companies use profits to pay off these debts but when the economy is in the doldrums or in recession, such as the case now, it is a controversial practice that is raising many red flags.
The practice has expanded that European companies have begun issuing high risk bonds known as payment in kind or PIK notes. These notes are used to pay dividends to their private equity backers and this allows the borrowers to defer payment of the interest on the debt instruments. The problem arises when the companies have become unable to pay the bonds in full when they actually fall due as the interest is compounded with the principal.
This is known as dividend recapitalization and the volumes seen now are near the Eur10 billion bills that was present prior to the 2007 financial crisis according to Standard & Poor's Data.
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