What is PIK interest?

PIK, or payment in kind, means interest on a loan is added to its balance instead of being paid in cash.

In practice

PIK terms usually appear in mezzanine, holdco and some unitranche debt, and sometimes as a PIK toggle that lets the borrower choose cash or PIK each period. The accrued interest compounds, and is typically repaid with principal at maturity or on a refinancing or sale. Lenders often charge a higher rate for PIK. It is also called capitalized interest.

An example

Round numbers, not a real fund

Say a company owes $100 million with 10% PIK interest. After a year it owes $110 million, having paid no cash interest.

Why it matters

It eases a borrower’s cash pinch today, and its growing balance is a worry for lenders later.

A definition, not advice; where usage varies the entry says so. Something wrong? Tell the desk.

Related terms

MezzanineMezzanine debt ranks below senior loans and above equity, so it is riskier. It usually pays a higher interest rate, often partly paid in kind, sometimes with equity warrants.
UnitrancheA unitranche loan combines senior and junior debt into one loan with a single blended interest rate, usually from one direct lender or a small group.
Private creditPrivate credit is lending by investment firms rather than banks, directly to companies, with the loans held in funds rather than traded on markets.
Leveraged buyoutA leveraged buyout, or LBO, buys a company using mostly borrowed money, with the company’s own assets and cash flow backing the debt.
Dividend recapA dividend recapitalization is when a company borrows new debt and uses the money to pay a dividend to its owners, usually a private equity fund.

The terms, in the news each morning.

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