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Payment-in-Kind (PIK) STEP 10

Interest expense and preferred dividends may be paid "in kind", as described in more detail on our page dedicated to this topic. The percentages in our payment-in-kind ("PIK") schedule near the bottom of the debt schedule specify the portion of total interest or dividends that are paid in kind. Setting up the schedule this way supports PIK interest/dividends ranging anywhere from 0% to 100% of total interest/dividends, and allows us to vary the PIK percentage over time. We generally assume there is no PIK interest, unless we have a specific reason for doing otherwise. PIK interest is more common in LBOs where the PIK feature can provide some relief from onerous debt service requirements that must be met with cash.

Although we show PIK assumptions for the revolver, senior credit facility, and the subordinated note, PIK interest is not normally a feature of these types on debt instruments. We include these assumptions, anyway, to provide flexibility in the operating model to replace any of these types of debt with bonds or preferred stock that could have PIK features.

Note that the PIK interest and dividends in each period accrue to the convertible bond and preferred stock balances, respectively, and are also added to operating cash flows in the cash flow statement as adjustments to net income, since net income reflects total interest expense and preferred dividends, inclusive of non-cash PIK.

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