A Payment-In-Kind Bond is a bond with which the issuer has the right to make the annual coupon payments by issuing new bonds of the same type. The issuer of a PIK thus has the right to pay interest to its creditors by issuing new Payment-In-Kind Bonds. PIK Bonds are often issued by companies with a rating below investment grade, so they have a lower credit rating, but also for this reason they usually offer a higher interest rate.
Advantages and Disadvantages of a Payment-In-Kind Bond
The investor can achieve higher returns with this type of bonds, but also takes a higher risk. However, he usually has the choice of receiving the upcoming interest payment in cash or in the form of new PIKs. This is then precisely regulated in the bond terms and conditions. For the issuer, it can make perfect sense to issue payment in kind bonds. This allows the company to buy time if it has liquidity problems and is struggling to raise the money for the interest payments. However, this option results in even more debt that has to be paid afterwards. In addition, of course, the newly issued bonds will also incur interest payments the next time around, steadily increasing the debt burden for the company.