PIK Interest (Payment-in-Kind)

PIK (payment-in-kind) interest is interest paid by increasing the principal balance of the debt (or issuing more notes) instead of paying cash. The claim compounds: interest accrues on a growing principal base until repayment or maturity.

PIK preserves cash flow for the borrower — useful in highly levered deals, holdco notes, mezzanine tranches, and stressed situations (PIK toggles let the issuer switch between cash pay and PIK, usually at a higher PIK rate). The cost is faster debt growth and higher risk for the lender, priced through higher rates.

Modeling and accounting mechanics: PIK interest is an expense on the income statement (and typically tax-deductible, subject to limitations such as AHYDO rules for certain high-yield discount obligations), but it is a non-cash item — added back in cash flow from operations — while the debt balance grows on the balance sheet.