medium · Investment Banking

In a highly leveraged LBO, why might a sponsor prefer a 'PIK toggle' on a Mezzanine instrument?

1. It allows the sponsor to avoid recognizing interest expense on the Income Statement.
2. It ensures the IRR is always higher than a standard cash-pay instrument.
3. Lenders offer lower overall interest rates on PIK toggle notes than on senior secured debt.
4. It provides the company with the flexibility to conserve cash during periods of tight liquidity or high CapEx requirements.

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