medium · Debt Capital Markets bond-instruments-structures

When computing a borrower's Total Leverage ratio (Total Debt / EBITDA), how is the interest from a PIK-toggle note typically treated by credit analysts?

1. It is treated as a contingent liability and excluded from the debt balance until maturity
2. PIK interest is added to the debt balance as it is incurred, increasing total leverage over time
3. It is treated as equity credit similar to a corporate hybrid instrument carrying partial equity content
4. It is netted against the issuer's cash balances because it represents a purely non-cash accrued expense

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