medium · Corporate Credit Analysis
If a borrower is 'PIK-ing' (Paying-in-Kind) its interest, how does this appear in the Unlevered Free Cash Flow (UFCF) versus the Funds from Operations (FFO)?
- UFCF will decrease because the debt balance is growing, which is treated as a working capital drain.
- FFO will decrease significantly because the 'accrued' interest must be subtracted to reflect the economic reality.
- UFCF is unaffected as it excludes interest; FFO is higher than it would be under cash interest because the outflow is non-cash.
- Both metrics will decrease as the growing interest burden represents a contractual 'leak' in the waterfall.
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