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).

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.

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