PIK (Payment in Kind)
Private Equity glossary · Advanced LBO Modeling Mechanics & Deal Structuring
Definition
Interest (or preferred dividend) paid by increasing the instrument's principal balance rather than in cash — the lender accrues the coupon and capitalizes it onto the loan. Preserves cash for sponsor distributions, growth investment, or debt service on senior tranches. Common in mezzanine (10-14% all-in, often part-cash/part-PIK), holdco PIK notes (12-16% structurally subordinated), and PIK toggle facilities (borrower's option). PIK accretes the debt balance and the leverage ratio over time, creating refinancing risk at maturity.
PIK (Payment in Kind) in plain English
PIK (payment in kind) is a way of paying interest on a loan WITHOUT paying cash — instead of writing a check, the borrower just adds that interest onto the pile they already owe, so the debt quietly grows. Companies do this to keep precious cash free for other uses, but it's a trade: the loan balloons over time, so they owe a much bigger amount when it finally comes due. It's like a credit card where you never make a payment and the interest just piles onto the balance month after month. That's powerful when cash is tight but dangerous, because the swelling debt can become hard to pay off or refinance at the end.
Also called: Payment in Kind
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