Payment in Kind (PIK) Bonds
What it is:
How it works/Example:
Why it matters:
PIK bonds are used by the issuer to give themselves some breathing room in case the company runs into liquidity problems. By triggering the provision to issue the buyer more bonds (more debt), the company lessens the need to make cash payments on the bond coupon to the bond buyer. However, it does result in more debt (because of the dividend that will need to be paid to the buyer of more bonds). At some point, the debt needs to be repaid. However, with the company overleveraged, it can sometimes run into problems.
PIK bonds have been used in very competitive bond markets where lots of equity is chasing very few deals.