For the last few years, the supply of equities traded in the U.S. has fallen, and the number of bond issues has risen. These aren’t two unrelated trends, but a natural byproduct of the buyout boom.
There are many temptations for corporate executives to transition from a publicly traded entity to a privately held one. Sarbanes Oxley has proven both expensive and onerous for public companies. Increased scrutiny of executive compensation has made it more difficult for CEOs to make a real lot of money. In most cases, the corporate jet and other perks have been made strictly off-limits.
As a result, buyout firms have had their pick of the litter in buying publicly traded firms. They finance these deals with easy, cheap credit. And as the appetite for these loans have increased, several forms of aggressive, “covenant-lite” packages have been developed. One example is the toggle note, a security in which the issuer has the option of remitting interest payments in the form of cash or more debt.