PIK interest (“paid-in-kind”) is a form of non-cash interest, meaning the borrower compensates the lender in the form of additional debt as opposed to cash interest.
PIK interest typically carries a higher interest rate because it has a higher risk to the investor (i.e.,delayed payments result in less certainty of being paid).
From the perspective of the borrower, opting for PIK conserves cash in the current period and Thus represents a non-cash add-back on the CFS.
However, PIK interest expense is an obligation that accrues towards the debt balance due in thefinal year and compounds on an annual basis.
