Payment in Kind (PIK):Mechanics and Rise in Prominence

Payment in Kind (“PIK”) refers to the payment of liabilities in the form of additional securities. PIK is akin to issuing new securities, most commonly debt, equal to the interest payment due and is a common feature in debt instruments used to fund leveraged buyouts (“LBOs”). This article describes types of PIK securities and various PIK mechanisms such as provisions on when and how much PIK may be used and its role in collateralized loan obligations (“CLOs”). Further, this article explores the popularity of PIK, its advantages, and the challenges PIK may pose to creditors, borrowers, and equity sponsors.