More than any other sponsor, Apollo Management LP looks to be benefiting from a pay-in-kind toggle interest option that some of its portfolio companies negotiated back when credit flowed cheaply.

Pay-in-kind notes allow a company to pay interest with more debt rather than cash, or with a combination of the two. PIKs have been part of the high-yield landscape for years. Before 2005, speculative-grade PIK loans and notes had been issued mainly as subordinated or convertible debt. During the buyout boom, however, they were commonly used as senior debt to finance leveraged buyouts or pay sponsors dividends, says Steven Oman, a senior vice president with Moody's Investors Service.

Even after the debt crisis struck last summer, at least one senior PIK loan squeezed through. In November 2007, a $750 million senior unsecured PIK toggle bridge loan was used to finance Avaya Inc.'s $8.3 billion buyout by TPG Capital and Silver Lake, Oman notes.

For a growing number of companies electing to use the PIK option, it could be "a warning sign that they might be facing tougher times," says Oman. Although companies can take advantage of the instruments for a fixed period -- generally three or four years -- deferring cash payments on toggle notes and loans is probably not enough "to keep the wolf at bay for very long," he adds. The reason: These companies still have to make semiannual payments on other debt instruments, as well as the problem of weak liquidity.

The default rate on U.S. speculative-grade debt, while still below average, is rising. At the end of September it stood at 3.4%, says Oman, up from 1.2% a year ago. The default rate has stayed below the long-term average of 5% partly because of the loose terms sponsors were able to negotiate for their companies when debt was easy to come by.

The most prodigious user appears to be Apollo, according to Moody's recently released analysis of 11 private equity-backed companies that have elected to use the PIK interest option. For instance, the sponsor had arranged $350 million of senior toggle notes to help finance its $3.1 billion LBO of specialty retailer Claire's Stores Inc. and $1.4 billion of toggle notes to back the $31 billion buyout of casino operator Harrah's Operating Co. Moody's does note that it isn't sure whether Apollo "was a more frequent user" of PIK toggle notes or "has simply been more willing" to exercise the option.

A spokesman for Apollo Management declined comment.

The companies listed by Moody's are making a judgment call either to delay interest payments because of serious cash flow problems or to conserve cash amid uncertainty, says Oman. Moody's characterized Claire's as having "little choice" but to tap its PIK option, while Harrah's appears to have enough liquidity meet its interest payments.

Understandably, lenders have become more cautious in light of the market turmoil. Oman says that one of the companies "felt it made sense to start PIK-ing now," given that it didn't know for sure whether its bankers would necessarily "be there" at crunch time.

But in the grander scheme of things, a company that is bleeding cash is only delaying its problems. Whatever interest it is saving on its PIK notes, Oman concludes, it likely is not enough to rescue it.