AFO · Glossary
PIK (Payment In Kind)
Interest paid by issuing additional debt rather than cash — common in mezzanine and private-credit structures.
What this term means in practice
PIK — Payment In Kind — is interest paid by issuing additional debt rather than cash. The borrower's interest obligation each period gets capitalised into the loan balance instead of paying out in cash, deferring the cash drain to maturity. Common on mezzanine and unitranche structures where the borrower needs the cash flow during the deal's ramp years.
The arithmetic is compounding: a 14% all-in mezz with 8% cash-pay and 6% PIK means the loan balance grows by 6% per year on top of any new draws. Over a 5-year tenor, the principal at maturity is meaningfully larger than the original advance. The CPA models the maturity-date payoff carefully — a refinancing or exit at year 5 needs to retire the grown balance, not the original draw.
PIK is useful when the deal's cash flow needs to fund growth in the early years; it's dangerous when it's used to hide a coverage problem. The honest test: would the deal close with full cash-pay terms? If not, the PIK structure is masking a coverage gap rather than smoothing a real timing issue.
Where this matters in the catalog
Programs that turn on PIK.
Mezzanine Debt
Second-lien or subordinated debt when senior capacity is exhausted.
Private Credit / Unitranche
Bespoke debt structures from non-bank private credit funds. Big-ticket only.
Where the definition meets your situation.
The CPA can walk through how this concept applies to your business in twenty minutes — what providers will ask, where the negotiation matters, what the trade-offs actually look like in your numbers.