what is payment in kind pik 
payment in kind pik is the use of a good or service as payment instead of cash payment in kind also refers to a financial instrument that pays interest or dividends to investors of bonds notes or preferred stock with additional securities or equity instead of cash payment in kind securities are attractive to companies preferring not to make cash outlays and they are often used in leveraged buyouts understanding payment in kind pik payment in kind securities are a type of mezzanine financing where they have characteristics indicative of debt and equities they tend to pay a relatively high rate of interest but are considered risky investors who can afford to take above average risks such as private equity investors and hedge fund managers are most likely to invest in payment in kind securities payment in kind notes give the issuer a chance to delay making dividend payments in cash and in return for the delay the issuing company typically agrees to offer a higher rate of return on the note in most cases pik notes compromise a fraction of a company s total outstanding debts and the financier structures these notes so they mature later than the company s other debts this allows the company to focus on repaying traditional debts or debts tied to cash dividends more quickly but it adds additional risk to the financier to cover their risk most financiers stipulate an early payment penalty to maximize their potential earnings the phrase payment in kind also applies to accepting cash alternatives for work or services for example a farmhand who is given free room and board instead of receiving an hourly wage in exchange for helping out on the farm is an example of payment in kind the internal revenue service irs requires people who receive payment in kind income through bartering to report it on their income tax return for example if a plumber accepts a side of beef in exchange for services they should report the fair market value of the beef or their usual fee as income on their income tax return 1the internal revenue service irs refers to payment in kind as bartering income types of payment in kindpayment in kind instruments have evolved to take several different forms agreements may have flexible terms that depend on prevailing macroeconomic conditions or elections by the borrower traditional or true payment in kind agreements explicitly layout the arrangement for cash payments and in kind payments loan terms are predefined and this is the most standard type of payment in kind arrangements in addition to defined dollar amounts timing expectations are also defined in advance pay if you can agreements stipulate that interest is supposed to paid in cash at specific intervals or at a designated cadence if the conditions surrounding interest payments are not satisfied the borrower may opt to make a payment in kind interest payment this pay if you can assessment is often imposed at a higher interest rate and is only triggered if specific covenants or agreements are achieved i e an insufficient amount of capital was on hand at a specific time sometimes called toggle notes or pay if you want pay if you like agreements gives the borrower though sometimes the issuer the discretion to elect the type of payment to make the borrower can often choose between paying in cash in kind or a combination of the two this structure allows a borrower to continue to pay interest on a bond or defer payments until the bond matures should the borrower elect to defer cash payment and instead be assessed payment in kind interest the prevailing interest rate used will be higher certain debt agreements add in a holding company holdco level in which debt payment are reliant on the operating company s stream of cash any debt service or repayments of principal may be contingent on distributions from an operating group that may be subject to conditions of its own because the downstream holding company may not be guaranteed credit support from its parent entity holdco payment in kind agreements are often riskier payment in kind agreements can include shares of stock or equity discounts companies wanted to preserve capital can opt to dilute equity as their form of payment advantages and disadvantages of payment in kindcompanies enter into payment in kind agreements because debt instruments can be used to leverage their existing capital structure companies looking to avoid pressuring their cash flow may engage in these agreements this is especially true for companies with long cash conversion cycles where inventory turnover is slow and capital is often tied up for long periods of time payment in kind agreements may also have flexibility in several respects first payment in kind agreements may give the borrower the option to may payment or in kind payments there may also be flexibility in terms of covenants that require one form of payment over the other though flexibility may be appreciated payment in kind agreements may encourage a company to continually defer payments companies may also not be motivated to meet financial covenants as failing to achieving certain criteria may defer interest payments which the company may find favorable in kind payment assessments are often charged at a higher rate of interest than cash payments though a company may preserve cash it will face higher net charges that often demand more company resources though in kind assessments for example certain hybrid agreements may entitle the lender to purchase securities of the company at a discount again though capital is preserve equity is diluted and management now owns a smaller portion of the company due to the in kind agreement may allow a company to leverage their capital through debtgives a company flexibility over the method of paymentsmay help cash strapped companies still enter into debt agreementsgives a company more control over the potential timing of when payments occurmay incentivize companies to continually defer payment obligationsoften result in higher interest assessmentsmay dilute ownership if interest is paid in equity or equity discountsexample of payment in kindto illustrate how payment in kind notes work imagine a financier offering a struggling company payment in kind notes worth 2 million the notes have a 10 interest rate and mature at the end of a 10 year period each year the note incurs 200 000 in interest however instead of being required to repay that amount or any principal payments the interest is added to the debt in kind meaning more debt as a result by the end of the first year the company owes 2 2 million and that amount continues to grow until the loan matures when the cash is due 