Module IV· Debt TranchesBasic
Question
What does 'PIK' mean and when is it used on debt?
Answer
PIK = Payment-in-Kind. Instead of a cash coupon, the interest amount is capitalized as additional debt.
Example
$100m mezz, 5% PIK:
- Year 1: 100 × 1.05 = 105
- Year 2: 105 × 1.05 = 110.25
| Debt type | Typical PIK share |
|---|---|
| Mezzanine | 3-5% PIK + 8-10% Cash |
| Holdco PIK Notes | 100% PIK (12-15%) |
| Shareholder Loan | 100% PIK (8-12%) |
| Senior TL | usually 0% (exception: PIK Toggle) |
Pitch tip
'When PIK instead of cash?' → in Years 1-2 with tight cash flow, or on mezz where cash must be reserved for senior. Trade-off: higher total yield against lower cash pressure. Mind the interest deductibility limit (~30% of EBITDA in most jurisdictions).