Payment-In-Kind Security

payment-in-kind security (PIK)

A relatively unusual type of security that allows the issuer to pay the investor with additional shares (in the case of PIK preferred) or with bonds (in the case of PIK bonds) rather than with cash. Payment-in-kind bonds and preferred stock may cause cash flow problems for investors who must pay income taxes on the market value of the additional securities received. PIK securities nearly always originate as a result of a leveraged buyout.

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Payment-In-Kind Security

A bond or preferred stock in which coupon payments or dividends come in the form of more bonds or shares, rather than cash. At times, the investor has the option of choosing whether to accept cash or payment-in-kind, but more often this option resides with the issuer. A problem with PIK securities for the issuer is the fact that it becomes tempting to pay bond coupons with more debt, rather than cash, when the company has a liquidity problem. Of course, doing this often only adds to the issuer's liquidity problems. Likewise, payment-in-kind securities can hurt investors as they must pay taxes on the market value of these securities and may lack the cash to do so. Payment-in-kind bonds were not unusual during the private equity boom in the mid-2000s, but became rare during the credit crunch at the end of the decade.