hard · Investment Banking

In an LBO, a 'PIK Toggle' feature on a mezzanine debt instrument primarily provides the borrower with which of the following benefits?

1. Exemption from all maintenance covenants for the duration of the loan term.
2. Automatic conversion of the debt into common equity upon the achievement of specific EBITDA targets.
3. A lower overall cost of capital compared to traditional senior bank debt.
4. The ability to conserve cash during periods of tight liquidity by adding interest to the principal balance.

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