PIK loan.docx

PIK loan.docx

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PIKloan

PIKloan

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SeealsoInkind

APIK（PaymentInKind）loanisatypeofloanwhichtypicallydoesnotprovideforanycashflowsfromborrowertolenderbetweenthedrawdowndateandthematurityorrefinancingdate,noteveninterestorpartsthereof（seemezzanineloan）,thusmakingitanexpensive,high-riskfinancinginstrument.PIKistobeinterpretedasinterestaccruinguntilmaturityorrefinancing.

PIKloansaretypicallyunsecured（i.e.,notbackedbyapledgeofassetsascollateral）and/orwithadeeplysubordinatedsecuritystructure（e.g.,thirdlien）.Maturitiesusuallyexceedfiveyearsandinastandardoffer,theloancarriesadetachablewarrant（therighttopurchaseacertainnumberofsharesofstockorbondsatagivenpriceforacertainperiodoftime）orasimilarmechanismtoallowthelendertoshareinthefuturesuccessofthebusiness,makingitahybridsecurity.

Contents

∙1Returnandinterest

∙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

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Negativeamortization

FromWikipedia,thefreeencyclopedia

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Theexamplesandperspectiveinthisarticlemaynotrepresentaworldwideviewofthesubject.Pleaseimprovethisarticleanddiscusstheissueonthetalkpage.（December2010）

（Learnhowandwhentoremovethistemplatemessage）

Infinance,negativeamortization（alsoknownasNegAm,deferredinterestorgraduatedpaymentmortgage）occurswhenevertheloanpaymentforanyperiodislessthantheinterestchargedoverthatperiodsothattheoutstandingbalanceoftheloanincreases.Asanamortizationmethodtheshortedamount（differencebetweeninterestandrepayment）isthenaddedtothetotalamountowedtothelender.Suchapracticewouldhavetobeagreeduponbeforeshortingthepaymentsoastoavoiddefaultonpayment.Thismethodisgenerallyusedinanintroductoryperiodbeforeloanpaymentsexceedinterestandtheloanbecom