PIK (Payment in Kind)
A debt instrument where interest is not paid in cash but instead added to the principal balance, preserving cash flow for the borrower.
Also known as: Payment in Kind, PIK note, PIK toggle
One-line definition
PIK debt lets the borrower skip cash interest payments — instead, the outstanding balance grows, deferring all payments to maturity or exit.
Why it's used
In highly leveraged structures, cash interest service can be constraining. PIK preserves cash for operations or debt repayment of senior tranches.
Risk
PIK compounds: a 12% PIK note doubles in ~6 years. If the business underperforms, the equity is deeply underwater before any cash is returned.
Related terms
Mezzanine Debt
A hybrid financing instrument ranking between senior debt and equity, typically carrying a higher interest rate and often including equity warrants.
LBO (Leveraged Buyout)
An acquisition financed primarily with debt, where the target's cash flows service the leverage and equity returns are amplified.
Senior Debt
The highest-ranking debt in a capital structure, with priority claim on assets and cash flows, typically provided by banks or institutional lenders.