Paid in kind option trading
PIKs in leveraged buyouts typically carry a substantially higher interest and fee burden compared to senior loans, second paid in kind option trading loans, and mezzanine loans of the same transaction. From Wikipedia, the free encyclopedia. This makes it an expensive, high-risk financing instrument because the size of the debt may increase quickly, best online discount broker in india leaving lenders with big losses if the borrower is unable to pay back the loan. By that definition, PIK lenders prefer borrowers with strong growth potential.
Paid in kind option trading is typically provided to the acquisition vehicle, either another company or a special purpose entity SPEand not to the target itself. PIKs are typically unsecured i. Views Read Edit View history. Before the credit crunch ofseveral leveraged buyouts have seen some secured second-lien term bank loans coming with PIK or, more frequently, PIK toggle features, in order to support the firm's ability to cover cash interest during the initial period after the leveraged buyouts.
If the acquired company performs well, the Paid in kind option trading toggle feature allows the equity sponsor to avoid giving extraordinary returns to the PIK debt, which might happen if the debt were strictly PIK. Retrieved from " https: In leveraged buyoutsPIKs is used if the purchase price of the target exceeds leverage levels up to which lenders are willing to provide a senior loana second lien loanor a mezzanine paid in kind option tradingor if there is no cash flow available to service a loan i. Interest on PIKs is substantially higher than debt of higher priority, thus making the compound interest the dominating part of the repayable principal. This page was last edited on 2 Aprilat
The arrangement fee, which is usually payable up-front, contributes the least return and serves to cover administrative costs. PIKs are primarily used for leveraged buyoutsdividend recapitalizations,  and, more rarely, to finance acquisitions. Typically, refinancing PIK loans in the first years is either completely restricted or comes at a high premium i. This is a different type of PIK toggle, also known as "contingent cash pay" or "pay if you can", where borrowers pay interest in cash and only "toggle" paid in kind option trading payment in kind under certain conditions; for example, if there is insufficient cash, usually determined by paid in kind option trading cash flow trigger. Look up payment in kind in Wiktionary, the free dictionary.
Retrieved from " https: Retrieved 15 February This also benefits borrowers, as they may opt for early payment of interest in cash, thereby minimizing the compounded payout at maturity. There are three types of PIKs that are characterized by differences in interest repayment.
Retrieved from " https: In addition, PIK loans typically carry substantial refinancing riskmeaning that the cash flow of the borrower in the repayment period will usually not suffice to repay all monies owed if the company does not perform excellently. If the acquired company performs well, the PIK toggle feature allows the equity sponsor to avoid giving extraordinary returns to the PIK debt, which might happen if the debt were strictly PIK.