A guide to private credit trends since 2021
- Payment-in-kind (PIK) interest, an innovative structure to defer interest payments, is being used more often in private credit, driven by relatively higher interest rates and pressure on borrowers with potentially high or weak financial performance.
- PIK usage has increased in a post-pandemic world as we moved into rate hikes and lenders moved toward capitalising more interest and increasing leverage on already stressed borrowers. As interest rates normalise but pressure on banks remain,
private lenders jump to fill the lending gap, resorting to innovative structures including payment-in-kind. - Increase in PIK-based lending may not mean an immediate crisis is brewing – but is often a sign of imminent stress in the market. A bubble behavior is beginning to show, not in the form of weakening private credit fundamentals but in adjacent aspects especially around valuation, credit rating and liquidity rights.
