Which type of debt normally carries PIK interest?

Mezzanine debt typically carries Payment-in-Kind (PIK) interest because it is a form of financing that sits between senior debt and equity in the capital structure. Mezzanine financing is often used to bridge the gap between the two, providing higher returns to investors due to the increased risk they take on compared to traditional senior debt holders.

PIK interest allows borrowers to defer cash interest payments by issuing additional debt instead of paying in cash. This is attractive in situations where companies prefer to conserve cash—especially during growth phases or restructuring—allowing them to utilize funds for operational needs or investments while still servicing their debt obligations in an alternative form.

In contrast, senior bank loans typically require regular cash interest payments, while subordinated debt also tends to have cash interest obligations. Asset-based lending is secured against company assets and generally requires cash interest payments as well, focusing on the borrower’s cash flow rather than deferrals. Thus, the structure and purpose of mezzanine debt make it the most likely candidate for carrying PIK interest.