medium · Private Credit loan-structures-instruments

Why might a lender require a higher interest rate for a PIK loan compared to an all-cash interest loan?

1. Because PIK interest is generally treated as not tax-deductible for the borrower.
2. To compensate for the increased risk of deferred payment and the lack of a periodic 'cash test'.
3. To discourage the borrower from ever exercising the PIK option within a toggle facility.
4. To cover the higher administrative costs of tracking the equity warrants often attached to PIK loans.

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