Payment-In-Kind Bond

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Payment-In-Kind Bond

A bond in which coupon payments come in the form of more bonds, 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 bonds for the issuer is the fact that it becomes tempting to pay 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. This type of bond was not unusual during the private equity boom in the mid-2000s, but became rare during the credit crunch at the end of the decade.
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References in periodicals archive ?
a semi-annual paying asset in a quarterly-paying liabilities CDO transaction), and PIK securities. Each of these assets is treated generally in the following sections.
PIK securities pose an interesting concern for a CDO transaction because there is no guarantee that these assets will resume current interest payments in cash or will repay the interest that has been deferred and capitalized and the interest due on such deferred interest.
For the purpose of the interest coverage test, the interest due on PIK securities is excluded from the interest coverage test once a payment of interest has been deferred.
For the purpose of the par value test, the PIK securities are treated in a special manner.
In addition, if the percentage of PIK securities within a CDO transaction exceeds 5%, it is likely that Standard & Poor's will request that the excess of the 5% of these securities be subjected to additional liquidity stresses to demonstrate the transaction's ability to pay timely interest on the rated liabilities.
A special consideration is given to PIK securities within a CDO of CDOs transaetion, where a great percentage (up to 100%) of the underlying assets may pay ha kind.