Definition
Payment-in-kind or PIK is a type of loan under which a borrower can make interest payments in non-cash forms. This loan format allows the borrower to repay without worrying about arranging for cash, specifically for the interest component. Such loans are common in leveraged buyout (LBO) deals. In PIK loans, a company can make interest payments by issuing fresh debt or stock options.
Example
Why it matters
PIK loans are beneficial for companies that have a liquidity problem but also have the capability to make interest payments without arranging for cash. This is especially helpful if a company is going through a management or leveraged buyout or if it is in the growth phase. To keep their liquid assets for other growth-related uses, companies prefer to pay their borrowings using fresh liabilities.PIK loans often attract high-interest rates and can therefore be very risky. Such loans are also considered unsecured credit and may lead to larger losses in case of a payment default.