medium · Corporate Credit Analysis cap-structure
An issuer has $500 million of 7% Senior Unsecured Notes with a 'Pay-in-Kind' (PIK) toggle feature.
If the company elects to PIK the entire coupon for one year, what is the pro-forma principal balance and the impact on the Interest Coverage ratio (EBITDA/Interest)?
- Principal becomes $465M; Coverage worsens.
- Principal stays $500M; Coverage improves as cash interest is zero.
- Principal becomes $535M; Coverage stays the same or worsens.
- Principal becomes $535M; Coverage improves as EBITDA is higher.
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