Payment-in-Kind (PIK)

What Is Payment-in-Kind (PIK)?

Payment-in-kind (PIK) is the utilization of a decent or service as payment instead of cash. Payment-in-kind likewise alludes to a financial instrument that pays interest or dividends to investors of bonds, notes, or preferred stock with extra securities or equity instead of cash. Payment-in-kind securities are appealing to companies preferring not to make cash outlays and they are frequently utilized in leveraged buyouts.

Understanding Payment-in-Kind (PIK)

Payment-in-kind securities are a type of mezzanine financing, where they have qualities indicative of debt and equities. They will generally pay a somewhat high rate of interest however are thought of as risky. Investors who can stand to face better than expected challenges, for example, private equity investors and hedge fund managers, are probably going to invest in payment-in-kind securities.

Payment-in-kind notes allow the issuer an opportunity to postpone making dividend payments in cash and return for the deferral, the issuing company commonly consents to offer a higher rate of return on the note.

In many cases, PIK notes compromise a negligible part of a company's total outstanding debts, and the financier structures these notes so they mature later than the company's different debts. This permits the company to zero in on repaying traditional debts or debts tied to cash dividends all the more rapidly, yet it adds extra risk to the financier. To cover their risk, most financiers specify an early payment penalty to expand their possible earnings.

The phrase "payment-in-kind" additionally applies to accepting cash alternatives for work or services. For instance, a farmhand who is given "free" room and board instead of receiving a time-based compensation in exchange for helping out on the farm is an illustration of payment-in-kind.

The Internal Revenue Service (IRS) requires individuals who receive payment-in-kind income through bartering to report it on their income tax return. For instance, on the off chance that a handyman acknowledges a side of hamburger in exchange for services, they ought to report the fair market value of the meat or their typical fee as income on their income tax return.

The Internal Revenue Service (IRS) alludes to payment-in-kind as bartering income.

Illustration of Payment-in-Kind

To illustrate how payment-in-kind notes work, imagine a financier offers a struggling company payment-in-kind notes worth $2 million. The notes have a 10% interest rate and they mature toward the finish of a ten-year period. Every year, the note incurs $200,000 in interest.

Notwithstanding, instead of being required to repay that amount or any principal payments, the interest is added to the debt in kind, meaning more debt. Thus, toward the finish of the first year, the company owes $2.2 million and that amount continues to develop until the loan matures, when the cash is due.

Highlights

• The Internal Revenue Service (IRS) alludes to payment-in-kind as bartering income and it requires individuals who receive income through bartering to report it on their income tax returns.
• The phrase "payment-in-kind" additionally applies to the accepting of cash alternatives for work or services.
• Payment-in-kind (PIK) is the utilization of a decent or service as payment or compensation instead of cash.

FAQ

What Is Payment-in-Kind (PIK) Debt?

Payment-in-kind likewise alludes to a financial instrument that pays interest or dividends to its investors. It's a type of mezzanine financing with qualities indicative of debt and equities. They will generally pay a moderately high rate of interest however are viewed as risky. PIK notes allow the issuer an opportunity to postpone making dividend payments in cash and return for the deferral, the issuing company normally consents to offer a higher rate of return on the note.

What Is the Original Meaning of Payment-in-Kind (PIK)?

The phrase "payment-in-kind" likewise applies to accepting cash alternatives for work or services. For instance, a farmhand who is given "free" room and board instead of receiving a time-based compensation in exchange for helping out on the farm is an illustration of payment-in-kind. PIK is derived from the bartering system that was involved before the coming of money for the purpose of exchange.

How could PIK Debt Be Attractive to Some Firms?

PIK securities are appealing to companies preferring not to make cash outlays. In many cases, PIK notes compromise a negligible part of a company's total outstanding debts, and the financier structures these notes so they mature later than the company's different debts. This permits the company to zero in on repaying traditional debts or debts tied to cash dividends all the more rapidly, PIK debt is much of the time utilized in leveraged buyouts.