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What is payment-in-kind interest in private credit?
Payment-in-kind (PIK) interest is when a borrower adds interest to the loan balance instead of paying it in cash. The lender books the income, but not a dollar of it arrives.
Say a US$10 million loan at 12% goes fully PIK. A year later the borrower owes US$11.2 million, and after two years about US$12.5 million. The lender books US$1.2 million of income, then about US$1.3 million. What you actually have is a bigger claim on the same company, not cash in hand.
Some PIK is agreed on day one. A growth company or a heavily levered buyout expects cash to be tight for a while, so the loan is built that way and priced higher. That's fine. The one to worry about is PIK added later by amendment, where the borrower was meant to pay cash and couldn't.
The loan hasn't technically defaulted, because the lender agreed to the change. Under the new documents nothing went wrong and the loan stays 'performing.' On a fund report it can sit at or near par while the income line keeps growing, even though no cash has arrived.