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Direct lenders agree to PIK as borrowers feel tariff pressure
by Lisa Fu
Borrowers are facing stress and asking direct lenders for the option to use payments-in-kind instead of cash for interest payments, leading to debate over whether PIK use aids recovery or simply obscures financial stress.
With US tariff negotiations introducing uncertainty and high interest rates pressuring cashflows, there has been an uptick in stressed borrowers asking to use PIK to defer interest payments, according to bankers.
PIK is used in two ways — by healthy companies wanting to temporarily defer interest payment in favour of fuelling growth, or by borrowers struggling to pay cash interest.
“Doing a restructuring using PIK can be a precursor to default,” said Clay Montgomery, a vice president at Moody’s Ratings. A company having to suddenly PIK all payment is usually a bad sign, indicating underlying fundamental struggles at the company and an inability to manage the interest burden.
If sponsors are putting in more equity, then that’s a positive
Brad Marshall
Global head of private credit strategies
Blackstone
Without a clear plan for refinancing or a turnaround, PIK risks compounding existing debt burdens, diluting equity value and making recovery more difficult for credit holders, according to Rithm Capital’s May white paper.
“It’s also important to monitor how much the loan gets marked down,” Montgomery said. “If you have a conversion to full PIK and the loan is getting marked down, chances are that loan is not going to recover.”
PIK is sometimes used as a tool by private credit managers to create better alignment or give companies a chance to weather a temporary storm.
“If you can create a dynamic where the sponsors are getting more invested in the business that’s underperforming by putting in more equity, then that’s a positive thing for us,” said Brad Marshall, global head of private credit strategies at Blackstone. “We can then be a little more accommodating. We want them to be successful.”
When used correctly, a borrower can use the period where it is not paying cash interest to implement cost structure reforms or change business direction.
“PIK, in and of itself, is not bad. You need to peel back the onion a little and figure out why PIK is being used,” said Chris Lund, managing director and co-portfolio manager of institutional vehicles at Monroe Capital.
Seeing tariff-related stress as somewhat temporary, many lenders are willing to give borrowers grace with PIK, a banker said. However, if today’s macroeconomic conditions extend into September and October, lenders will need to re-evaluate.
