PIK note

A “payment-in-kind” (PIK) note (or loan) is a way for companies to borrow money.

A "payment-in-kind" (PIK) note (or loan) is a way for companies to borrow money. When issuing a bond, a company typically borrows a fixed amount of money, for a fixed period of time, and pays a fixed amount of interest every year. With a PIK note, rather than pay interest each year, the interest is rolled up (capitalised) and added to the principal (hence the name, payment in kind you are being asked to forgo annual interest payments in exchange for a higher overall payment at maturity).

Advertisement - Article continues below

Clearly, PIK loans are riskier than traditional debt (in the jargon, they are a form of "mezzanine debt"), because the lender receives no cash back until the end of the loan period.They are also usually unsecured, and low in the pecking order in terms of repayment if the company goes bust. As a result, they tend to offer high interest rates.

There are also usually high early-repayment penalties (because lenders want to gain the compound interest from the loan, rather than see it repaid early). They are used by companies with high growth potential that would rather use their free cash for expansion and investment. The idea is that the high growth will be sufficient to repay the hefty interest bill at the end of the period. One high-profile example of a deal involving PIK notes going wrong is UK budget fashion chain Peacocks, which went into administration in 2012 (before being bought by Edinburgh Woollen Mill).

In 2005, a £404m management buyout of the company was part-funded by £110m in PIK notes, at an annual interest rate of 17.2%. Following the financial crisis, Peacocks was unable to refinance the deal. By 2010, the payment due had reached £301m, and by the time the company went into administration, the PIK liability was thought to be around £400m.



Personal finance

Make the most of the UK's holiday from debt

Loans and credit card payments may be frozen for three months, but you will still have to cut your borrowing.
14 Apr 2020
Personal finance

FCA proposes credit-card payment freeze and £500 overdraft for all

The Financial Conduct Authority has said that loan and credit card repayments could be frozen for three months, while those affected financially by th…
2 Apr 2020
Small business

Small business owners should beware when backing their business debt

A personal guarantee makes you liable for your firm’s debt. Tread very carefully.
2 Oct 2019
Alternative investments

P2P lending hits a speed bump

The P2P lending sector is slowing, but it remains appealing in an era of zero interest rates, says David Stevenson.
3 Sep 2019

Most Popular

EU Economy

Here’s why investors should care about the EU’s plan to tackle Covid-19

The EU's €750bn rescue package makes a break-up of the eurozone much less likely. John Stepek explains why the scheme is such a big deal, and what it …
28 May 2020
Industrial metals

Governments’ money-printing mania bodes well for base metals

Money is being printed like there is no tomorrow. Much of it will be used to pay for infrastructure projects – and that will be good for metals, says …
27 May 2020

As full lockdown ends, what are the risks for investors?

In the UK and elsewhere, people are gradually being let off the leash as the lockdown begins to end. John Stepek looks at what risks remain for invest…
29 May 2020