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Mezzanine and PIK Loans
Mezzanine debt is even more risky than subordinated debt. It will rank below
other forms of debt, but above equity in the event of the company going into
liquidation. It is the most risky debt, will offer a higher rate of
interest than the subordinated and senior levels of debt. Interest on
mezzanine debt is not always paid in in cash. What happens instead is that
the repayment that would have been made is instead added to the cost of the
loan. This later portion is known as payment in kind or PIK. In some cases
where mezzanine debt is used there are no interest repayments at all and all
the debt is rolled up to become an increased amount owed. These notes are
referred to as PIK notes. PIK notes are very similar to zero coupon bonds in
that they free the issuer from the need to service the borrowing with cash
until the notes/bonds reach maturity.
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