Payment in kind
Capital MarketsInterest added to the principal balance rather than paid in cash, preserving liquidity at the cost of a larger repayment.
Also written: PIK, PIK toggle, PIK interest
PIK interest is not forgiven, it is capitalised. Unpaid interest is added to the outstanding principal and compounds, so the borrower keeps cash now and clears a materially bigger balance at maturity or exit.
It appears in mezzanine, in holdco notes, and in a PIK toggle structure that lets the issuer choose each period between paying cash and paying in kind, usually at a higher rate when it elects to toggle.
The cost lands squarely on the equity. Every euro of accrued PIK is a euro more of debt at exit, subtracted before the sponsor sees anything, so a long hold with PIK accruing can quietly consume much of the return.
Read the election as a signal. A borrower toggling to PIK is telling you cash flow will not cover cash interest, which is information the covenants may not yet reflect.