The PIK loan or bond will typically be issued by the holding company of the parent of the corporate group receiving senior debt, with the PIK debt ranking behind the senior secured bank debt issued to the company, but ahead of equity investors. Deferred payment of cash is compensated by a higher rate of return than for senior debt. PIK debt typically refers to a loan or bond where all or some of the accrued interest is capitalised throughout the life of the debt instrument. Preferred equity shares (being a class of equity which ranks ahead of ordinary shareholders in an insolvency), convertible debt instruments (where loans or bonds can be converted into a specified portion of equity), and PIK debt (where interest payments are deferred and capitalised in accordance with certain terms), have been an increasing feature of recent deals for investors looking for ways to deploy capital and generate attractive returns, and deals structured with instruments of this nature will continue to develop and build confidence in such arrangements. These instruments offer much needed liquidity for companies, whilst protecting downside risk with equity upside potential for investors. Given the abundance of capital and low interest rates, a number of “hybrid” investments, which fall between pure debt and pure equity, are a popular feature in complex restructurings, enabling companies and investors alike to take a more cautious approach to PIK debt, while providing incentives and potential significant advantages. The popularity of PIK (“payment in kind”) debt, which peaked in the high risk appetite era just prior to the 2008 financial crisis, has seen a resurgence in recent years, incorporating a variety of characteristics and features designed to attract investors.
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