Toggle Note

A Toggle Note is a special type of payment-in-kind bond, the terms of which allow the issuer, at its discretion, in each coupon period to determine the coupon share that will be paid to the holder in cash (in-cash), and the coupon share for which payment will be deferred (in-kind). The payment can be done completely in any one of a number of forms, and in the form of their combination. The deferred part of the coupon, similar to the usual payment-in-kind (true payment-in-kind) bond, is either poured into the principal amount of the debt, or is paid in the form of new additional securities.

The fact that the issuer has the right to independently determine the amount of cash paid in each coupon period gave this type of pay-in-kind bonds a second name - pay-if-you-want (pay-if-you-like is less common).

The advantage of this instrument for issuers is the flexibility in managing liquidity when servicing debt. The disadvantage, or rather the premium for the opportunity to defer the cash payment is the higher coupon rate that the issuer pays if the pay-in-kind condition is used. For the borrower, compared to ordinary bonds, this type of debt instrument is associated with a higher yield and greater risk arising from a possible increase in duration in the event of a delay in payment, as well as a lower predictability of cash flow.

Previously, this type of debt instrument was popular among issuers with good credit ratings but who were experiencing temporary liquidity difficulties. Currently, toggle notes are also used by issuers in need of borrowed funds, while wanting to preserve liquid assets - most often these are the companies carrying out a leveraged buyout or to expand production.