June 14, 2022
Private Equity: The Resurgence of PIK Loans
Like everybody else, many PE portfolio companies are feeling a cash squeeze due to margin erosion, supply chain issues and other factors. In response, this PitchBook article says that private equity sponsors are showing a renewed interest in providing PIK financings to portfolio companies that find themselves in a liquidity crunch. Here’s an excerpt:
Responding to the new environment, some PE firms are renewing their appetite for alternative financing tools that can strengthen a company’s financial position. PIK loans, a hybrid security between pure debt and pure equity, are one of the rescue financing products that have experienced a resurgence recently, according to Emanuel Grillo, who heads the North American restructuring practice at Allen & Overy.
“What’s happening in the market is some weak companies in various PE portfolios are coming under stress and need more cash, and the concern is in the current marketplace where and how they get cash,” he said. “So, sponsors have to advance new funds, and they prefer to put the money in as debt because it’s new dollars and there is a fair amount of risk associated with them.”
“You are going to see [sponsors offer] a lot of junior-lien rescue financing to keep their senior lenders happy,” he added.
The big advantage of PIK debt to borrowers is that by allowing them to defer cash interest payments by making payments through the issuance of more securities, they can conserve cash and help stave off a liquidity crisis during periods of financial distress. The article points out PE sponsors like PIK debt because they don’t have to “hold a talk with other lenders and are adding capital in a way that won’t be restricted by the senior credit facility that’s already in the capital stack.”
– John Jenkins