---
title: "Payment-in-Kind (PIK) | Altss Glossary"
description: "Payment-in-kind (PIK) interest is interest paid by adding it to the loan's principal, or by issuing more of the same instrument, instead of in cash; the…"
canonical: "https://altss.com/glossary/pik-payment-in-kind"
---

Glossary · Security / instrument

# Payment-in-Kind (PIK)

Also called: PIK interest · PIK notes

Payment-in-kind (PIK) interest is interest paid by adding it to the loan's principal, or by issuing more of the same instrument, instead of in cash; the capitalised amount then accrues interest itself and is repaid at maturity or exit.

Publisher: Altss LLCPublished 2026-01-12Content modified 2026-10-02

ALTSS-CREDIT-047

With PIK, the borrower does not hand over cash for interest; the amount it owes simply grows. That preserves the borrower's cash today but compounds the debt, so the lender is owed more if things go wrong and has received less cash along the way. PIK can be designed into an instrument from the start, chosen period by period by the borrower, or added later when a borrower cannot pay cash.

## Formula

### PIK compounding

```
Balance after t years = opening balance × (1 + PIK rate / m)^(m × t)
```

`B_0`

opening principal

`r_PIK`

annual PIK rate (for split-coupon loans, only the PIK portion)

`m`

capitalisation periods per year, often quarterly in loans; the worked examples use annual capitalisation

Cash interest in later periods is usually charged on the capitalised balance, so the PIK portion also raises future cash interest. Credit agreements specify the capitalisation dates.

## Forms of PIK

| Form | How it works | Typical context |
| --- | --- | --- |

| Full (contractual) PIK | all interest capitalised from the start | holdco PIK notes, some [mezzanine](https://altss.com/glossary/mezzanine-debt), preferred equity dividends |

| Partial PIK (split coupon) | a fixed part of the coupon is cash and part is PIK, set at origination | growth and recurring-revenue loans; stretched unitranches |

| PIK toggle | the borrower chooses each period to pay cash or PIK, usually at a higher rate when it chooses PIK, sometimes for a limited number of periods | sponsor-backed loans and bonds |

| Amendment PIK | PIK introduced by amendment when a borrower cannot pay cash, often with a higher margin or fees | stressed credits |

The first three are contractual and priced at origination. The last is a credit event in substance, even if no default is declared.

## Why PIK changes the risk

- **Larger claim.** The lender's claim grows while its cash return falls, so more of its total return depends on repayment at the end.

- **Leverage creep.** Leverage rises unless EBITDA grows at least as fast as the PIK rate.

- **Recovery.** Recovery in default is measured against a larger claim, so loss severity rises.

- **Optics.** Cash interest coverage looks better because PIK interest is excluded from cash interest.

## Accounting and reporting

A lender's reported income can include PIK interest that has accrued but has not been received in cash; when it stops recognising that income for a loan in doubt is set by its accounting framework and its non-accrual policy. As a result, a fund's reported income can exceed its cash income. Common monitoring measures are:

- PIK income as a share of total investment income, which many [BDCs](https://altss.com/glossary/business-development-company) report separately in their periodic reports;

- the share of loans by value carrying PIK;

- the share of PIK added by amendment rather than at origination.

For US federal income tax, interest that is not unconditionally payable in cash, or in property other than the issuer's own debt instruments, at least annually is not qualified stated interest (26 CFR 1.1273-1(c)(1)(i)). It therefore forms part of the stated redemption price at maturity and can create original issue discount (26 U.S.C. 1273(a)), which a holder includes in gross income as it accrues, day by day, before it is paid (section 1272(a)(1)).

## How LPs read PIK exposure

Separate planned PIK, priced into the instrument at origination, from PIK that appeared through amendments or toggles after the borrower's performance weakened. A rising share of the second kind is an early sign of stress. Compare managers on cash yield and accrual yield separately.

## Worked examples

### Illustrative full PIK note

A $100m holdco note pays 12% PIK, capitalised annually, for five years. At maturity the borrower owes **$176.23m**, of which $76.23m is capitalised interest. If the issuer's EBITDA stays at $20m, its leverage through this note rises from 5.0x to about 8.8x without any new borrowing.

### Partial (split-coupon) PIK

A $100m loan pays cash interest plus a 3% PIK component. After five years the PIK component has grown the principal to **$115.93m**.

Examples are illustrative; figures are not market data.

## Not the same as

- [Original Issue Discount](https://altss.com/glossary/oid-original-issue-discount): Original issue discount (OID) is a discount at issue that accretes to par. PIK is interest that is capitalised as it accrues.

- Non-Accrual: A PIK loan still accrues income. A non-accrual loan has stopped recognising interest income.

- Preferred Equity: An accruing preferred dividend behaves like PIK economically, but it is an equity claim, not interest.

## Common mistakes

- Calling all contractual PIK "PIK toggle". Full and partial PIK are fixed at origination; a toggle is a borrower option.

- Treating PIK yield as equivalent to cash yield.

- Reading improving cash interest coverage as a credit improvement when interest has moved to PIK.

- Assuming PIK is always a distress signal. Contractual PIK in junior instruments is priced and planned.

## Edge cases

- A toggle exercised in every period turns a cash-pay loan into a full-PIK loan, with the higher toggle rate.

- Capitalised PIK usually ranks equally with the original principal and shares its security, but a new PIK instrument issued instead of capitalised interest may have its own terms.

## Sources

- [26 CFR 1.1273-1 - Definition of OID (stated redemption price at maturity; qualified stated interest)](https://www.law.cornell.edu/cfr/text/26/1.1273-1). U.S. Department of the Treasury / IRS (CFR text via LII), Current CFR text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 CFR 1.1273-1(b), (c)(1)(i) — supports: Qualified stated interest must be unconditionally payable in cash or property other than the issuer's debt instruments at least annually; other payments are in the stated redemption price at maturity

- [26 U.S.C. 1273 - Determination of amount of original issue discount](https://www.law.cornell.edu/uscode/text/26/1273). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 U.S.C. 1273(a)(1)-(2) — supports: Definition of original issue discount and stated redemption price at maturity

- [26 U.S.C. 1272 - Current inclusion in income of original issue discount](https://www.law.cornell.edu/uscode/text/26/1272). U.S. Congress (Internal Revenue Code; LII mirror), Current US Code text as published by LII (accessed 2026-10-02). Status: in force (checked 2026-10-02). 26 U.S.C. 1272(a)(1) — supports: Holder includes the daily portions of OID in gross income

## Related terms

6 terms

- [Mezzanine Debt](https://altss.com/glossary/mezzanine-debt)

- [Original Issue Discount](https://altss.com/glossary/oid-original-issue-discount)

- [Business Development Company (BDC)](https://altss.com/glossary/business-development-company)

- [Interest Coverage Ratio (ICR)](https://altss.com/glossary/interest-coverage-ratio)

- [Unitranche](https://altss.com/glossary/unitranche)

- [Private Credit](https://altss.com/glossary/private-credit)

## Referenced by

2 terms

- [Dividend Recapitalization](https://altss.com/glossary/dividend-recapitalization)

- [Subordinated Debt](https://altss.com/glossary/subordinated-debt)

## Concept record

Concept ID

ALTSS-CREDIT-047

Classification

Security / instrument · Deal terms & mechanics

Topics

Private credit

Version

2.0.0

Last reviewed

2026-10-02

Structured data

[JSON](https://altss.com/reference/concepts/pik-payment-in-kind.json)

Source check

Tax and accounting statements checked against the cited primary sources on 2026-10-02 ([how](https://altss.com/methodology)). General information, not advice.

## Canonical URL

https://altss.com/glossary/pik-payment-in-kind