Payment In Kind

Payment-in-kind (PIK) bonds often are issued by cash-strapped firms and firms doing leveraged buyouts. The PIK provision allows the issuer to pay coupon interest in the early years of the issue in the form of either cash or bonds with values equal to the coupon payment. Such bonds help reduce the issuer’s cash outflows, but at a cost of increasing the debt. Investors also assume a risky position; unless the issuer’s cash situation improves, they find themselves increasing their exposure to the questionable lender.