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∙2PIKtoggles
∙3Leveragedbuy-outs
∙4PIKbonds
∙5Examples
∙6Seealso
∙7References
∙8Externallinks
Returnandinterest[edit]
PIKlenders,typicallyspecialfunds,lookforacertainminimuminternalrateofreturn,whichcancomefromthreemajorsources:
arrangementfee,PIK,andwarrants.Therearealsominorsources,likeatickingfee.Thearrangementfee,usuallypayableup-front,contributestheleastreturnandismoreaimedtocoveradministrativecosts.PIKisinterestaccruingperiodafterperiod,thusincreasingtheunderlyingprincipal(i.e.,compoundinterest).Theachievedsellingpriceofthesharesacquiredunderthewarrantisalsoapartofthetotalreturnofthelender.Typically,refinancingofaPIKloaninthefirstyearsiseithercompletelyrestrictedorcomesatahighpremium(i.e.prepaymentprotection)tosuitinternalrequirementsofinvestingfunds.
InterestonPIKloansissubstantiallyhigherthandebtofhigherpriority,thusmakingthecompoundinterestthedominatingpartoftherepayableprincipal.Inaddition,PIKloanstypicallycarrysubstantialrefinancingrisk,meaningthatthecashflowoftheborrowerintherepaymentperiodwillusuallynotsufficetorepayallmoniesowedifthecompanydoesnotperformexcellently.Bythatdefinition,PIKlenderspreferborrowerswithstronggrowthpotential.Becauseoftheflexibilityoftheloan,alsointhelongterm,therearebasicallynolimitstostructuresandborrowers.Plus,inmostjurisdictionstheaccruinginterestistaxdeductible,providingtheborrowerwithasubstantialtaxshield.
PIKtoggles[edit]
WithaPIKtogglenote,theborrowerineachinterestperiodhastheoptiontopayinterestincashortoPIKtheinterestpayment.Sometimes,theborrowermayalsobeabletoPIKsomeportionoftheinterest(usuallyhalf)whilepayingtherestincash;
attimes,onlysomeoftheinterestmaybepaidinkindandtherestiscash-only.Thisfeatureallowstheissuerstoreducecashinterestpaymentsforaperiodifnecessary.ThedocumentationoftenprovidesthatifthePIKfeatureisactivated,theinterestrateisincreasedby25,50or75basispoints.
Insomecases,cashpaymentorPIKisatthediscretionoftheborrower;
inothercases,itisdeterminedbyacashflowtrigger.ThesearesometimesderisivelyreferredtoasPIYW(“PayIfYouWant”)andPIYC(“PayIfYouCan”).
Leveragedbuy-outs[edit]
Inleveragedbuy-outs,aPIKloanisusedifthepurchasepriceofthetargetexceedsleveragelevelsuptowhichlendersarewillingtoprovideaseniorloan,asecondlienloan,oramezzanineloan,orifthereisnocashflowavailabletoservicealoan(i.e.duetodividendormergerrestrictions).Itistypicallyprovidedtotheacquisitionvehicle,eitheranothercompanyoraspecialpurposeentity(SPE),andnottothetargetitself.
PIKloansinleveragedbuy-outstypicallycarryasubstantiallyhigherinterestandfeeburdenthandoseniorloans,secondlienloans,ormezzanineloansofthesametransaction.Withyieldexceeding20%perannum,theacquirerhastobeverydiligentinassessingwhetherthecostoftakingoutaPIKloandoesnotoutbalancehisinternalrateofreturnofequityinvestment.
BeforethecreditcrunchofSummer2008,severalleveragedbuy-outshaveseensomesecuredsecond-lientermbankloanscomingwithPIKor,morefrequently,PIKtogglefeatures,inordertosupportthefirm'
sabilitytocovercashinterestduringtheinitialperiodaftertheleveragedbuy-outs.Iftheacquiredcompanyperformswell,thePIKtogglefeatureallowstheequitysponsortoavoidgivingextraordinaryreturnstothePIKdebt,whichmighthappenifthedebtwerestrictlyPIK.ThePIKtogglelargelydisappearedinthewakeofthecreditcrunch,thoughinearly2013thereweresignsofatentativecomeback.[1]Towardmid-yearPIKtoggleloansreturnedinforceasthehighyieldbondmarketintheU.S.and-relativelyspeaking-Europeshiftedintohighgear.[2]
PIKbonds[edit]
Inmodernfinance,whenabondpaysinkind(PIK),itmeansthattheinterestonthebondispaidotherthanincash.Themostcommonformofthisisfortheprincipalowedtothebondholdertobeincreasedbytheamountofcurrentinterest.OtherformsofPIKarrangementsarealsofound,suchaspaying(transferringto)thebondholderanamountofstock(inthecompanyissuingthebondorinanother,typicallyrelated,company)withvalueequaltothecurrentinterestdue.
OftensucharrangementsarereferredtobytheacronymPIK.Mostbondspaycash,notinkind,coupons.
PIKcanbeusedasaverb(e.g.thebond"
PIKed"
)oranadjective(e.g.thatbondis"
PIKable"
).WhereapreviouslyPIKedamountisrevoked(asispermissibleinsomeagreements),thisisknownas"
unPIKing"
.
Examples[edit]
Mainarticle:
GlazerownershipofManchesterUnited
OnehighprofileuseofPIKsinvolvedthecontroversialtakeoverofManchesterUnitedFootballClubinEnglandbyMalcolmGlazerin2005.GlazerusedPIKloans,whichweresoldtohedgefunds,tofundthetakeover,muchtothedispleasureofmanyoftheclub’ssupporters,[3]becausetheburdenofthedebtwasplacedontheclubitself,nottheGlazers.
Seealso[edit]
∙Negativeamortization,asimilararrangementinmortgageloans
∙Zero-couponbond
∙Inkind
LookuppaymentinkindinWiktionary,thefreedictionary.
References[edit]
1.^"
Europe’sCFOsDothePIKToggleAgain"
.CFOInsight.Retrieved15February2013.
2.^"
PIKToggleBondsGainTractionInEurope'
sHighYieldMart"
.Forbes.
3.^Creditcrisisoneyearon:
Riskydebtnotescouldbealosinggame
Externallinks[edit]
∙PIKtogglebondshistoricalvolume|HighYieldBondPrimer
∙TravelportHoldingsLimitedPlanstoIssue$1.1BillioninTermLoansUnderaSeniorPIKFacility
∙CompanyEntersInto$854MillionSeniorSecuredCreditFacilitiesand$300MillionHoldingsSeniorPIKLoans
Retrievedfrom"
https:
//en.wikipedia.org/w/index.php?
title=PIK_loan&
oldid=708028644"
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Infinance,negativeamortization(alsoknownasNegAm,deferredinterestorgraduatedpaymentmortgage)occurswhenevertheloanpaymentforanyperiodislessthantheinterestchargedoverthatperiodsothattheoutstandingbalanceoftheloanincreases.Asanamortizationmethodtheshortedamount(differencebetweeninterestandrepayment)isthenaddedtothetotalamountowedtothelender.Suchapracticewouldhavetobeagreeduponbeforeshortingthepaymentsoastoavoiddefaultonpayment.Thismethodisgenerallyusedinanintroductoryperiodbeforeloanpaymentsexceedinterestandtheloanbecom