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GLOSSARYTERMS AS A CREDIT DESK USES THEM

PIK interest (payment in kind)

What is PIK interest, and why does a lender read cash and total interest cover apart?

ONE OF 416 TERMS · FREE · NO SIGNUP

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED

// THE SHORT ANSWER

PIK interest, payment in kind, is interest added to the principal instead of being paid in cash, so the debt grows each period and the accrued amount falls due at maturity or on refinancing. It is common in mezzanine, holding-company and private credit loans, sometimes as a toggle the borrower may elect, often within a cap. A lender reads cash interest cover and total interest cover separately and tracks leverage as the debt compounds: US$40m at 12% PIK, compounding annually, is about US$50.2m after two years, so earnings must grow by roughly a quarter for leverage to stand still.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// THE FULL PAGE

PIK Interest: a Worked Example →

The interest is paid in more debt, and the debt keeps growing.

// WHAT IT IS NOT

Capitalised interest is the same mechanism on a development loan, where the project earns nothing until it is finished and the facility funds the interest; PIK is a pricing term on loans to businesses already trading, usually chosen to preserve cash.

// WORKED IN

// NEXT TO IT

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