PIK (Payment-in-Kind)
PIK interest is paid by adding to principal instead of cash, compounding exposure over time.
Allocator relevance: High — increases downside severity and can signal borrower cashflow stress or aggressive structuring.
Expanded Definition
PIK can be contractual (PIK-toggle) or emerge in restructurings. While it boosts stated yield, it reduces cash income and increases loan balance—raising leverage and loss severity if the borrower weakens. Allocators separate “PIK as planned structure” from “PIK as distress symptom,” and they track PIK exposure as a portfolio health indicator.
Decision Authority & Governance
Governance includes documentation clarity, monitoring triggers, borrower reporting quality, covenant enforcement, and honest classification of accrual income versus cash income. Institutions expect the manager to disclose PIK proportions and stress-case outcomes.
Common Misconceptions
- PIK yield equals cash yield.
- PIK is always bad (context matters).
- PIK has no cost if the business recovers.
Key Takeaways
- PIK increases principal and tail risk.
- Separate cash yield from accrual yield in reporting.
- Rising PIK exposure can be a cycle warning.