medium · Investment Banking accounting
In a highly leveraged LBO, why might a sponsor prefer a 'PIK toggle' on a Mezzanine instrument?
- It lets the sponsor avoid recognizing interest expense on the Income Statement while the notes remain outstanding.
- It guarantees the sponsor's IRR will always exceed the return generated by an otherwise identical cash-pay instrument.
- Lenders typically charge meaningfully lower overall interest rates on subordinated PIK toggle notes than on senior secured bank debt.
- It provides the company with the flexibility to conserve cash during periods of tight liquidity or high CapEx requirements.
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