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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.