medium · Private Credit loan-structures-instruments
A borrower has a PIK toggle and chooses to PIK its interest during a recession.
What is the most likely effect on the lender's 'Recovery Risk' if the company eventually defaults?
- The risk remains the same because recovery is always calculated based on the original loan amount.
- The risk decreases because the lender has 'invested' more into the company.
- The risk is eliminated because PIK interest is senior to all other forms of debt.
- The risk increases because the total claim size has grown while asset values may have fallen.
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