Payment-in-kind (PIK) interest is not a four-letter word. But the way the market reacts to it these days, you would think it was profanity. To the critics, any company PIKing interest has failed and any lender accepting it is about to lose its shirt. In reality, PIK interest may be a valuable restructuring tool for private credit lenders, mitigating future losses rather than guaranteeing them.
Instead of paying interest in cash, a borrower puts it on the bar tab, and all that accrued interest comes due when the loan matures. Although the concept of paying in kind is about as old as debt itself, private credit managers have recently been leaning on it hard. After the sector’s troubles drew headlines earlier this year, it is no surprise the practice is now under intense scrutiny.
On Oct. 30, Fitch Ratings reported that its U.S. private credit default rate reached a record 6.3% for the 12 months through September. That sounds alarming until you look at what Fitch counts as a default. Half of the default events over the past year involved borrowers deferring interest or switching from cash to PIK interest. Another 38% were maturity extensions granted under financial stress. Only 12% were what most people picture when they hear the word default — uncured interest or principal payment defaults, bankruptcies, liquidations, or out-of-court restructurings.
Fitch has not changed its rules. Its methodology counts certain distressed switches to PIK as defaults, and that is a fair call. But a default and a credit loss are different animals. A default means the borrower could not keep the original promise. A loss means the lender does not get its money back. The first happens a good deal more often than the second.
What does look a bit fishy about PIK is the accounting. Private credit lenders book accrued PIK interest as income even though no cash changes hands. It is as if your daughter’s lemonade stand reported a $1 million summer because the kid down the street drank a million cups on credit. He really did drink the lemonade, but will his allowance cover it?
And there is good reason for concern. Allianz Research reports that PIK now accounts for 11% of private credit interest income, twice its late-2022 low, and that 55% of loans now PIKing did so later, rather than at origination. Research cited in this publication earlier this year found that loans switching to PIK after origination can default at up to 10 times the rate of cash-pay loans.
There is no doubt lenders have been relying heavily on PIK interest as a restructuring tool, but what is missing from these statistics is the boots-on-the-ground reality. A lender extending a lifeline may be preventing a loss, not postponing one. Companies do not generally ask for interest relief when business is booming. They are already in trouble. Comparing their default rates with those of healthy borrowers tells us precious little about whether PIK helped or hurt. The question is not how PIK borrowers perform compared with borrowers who do not need it. It is how much worse off those same troubled borrowers, and their lenders, might have been without it.
Picture a company that cannot make this quarter’s interest payment. The lender can demand its money and risk pushing the company over the edge, or let the interest ride while management attempts to fix what is broken. Lenders, of course, do not hand out that kind of patience for free. In exchange, they may get fresh equity from the sponsor, additional collateral, higher interest rates, tighter covenants, and greater oversight. From the outside, it looks like the lender blinked. But negotiated PIK, with fresh equity and tighter terms, could get the lender more in the end than forcing a liquidation or fire sale.
To be clear, PIK is not harmless. Every dollar on the tab is still a dollar of debt. A company with no credible turnaround will not miraculously repay its debt at maturity just because it got a break on cash interest. And its lender could end up in worse shape. But the right measure of success is not whether a rating agency records a default. It is what the lender ultimately gets back.
Recoveries on these loans take years to play out. Nobody knows yet whether that kid’s allowance will cover the lemonade tab. A PIK amendment, on the other hand, gets stamped a default the same afternoon, with no crystal ball.
The rise in private credit distress deserves a hard look. But treating every negotiated PIK concession as a future loss misreads how lending and loan workouts actually work. Sometimes the beginning of a successful restructuring looks remarkably like a default.
© Copyright 2026. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC, its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.
