A PIK, or payment in kind, is a type of high-risk loan or bond that allows borrowers to pay interest with additional debt, rather than cash.
That makes it an expensive, high-risk financing instrument since the size of the debt may increase quickly, leaving lenders with big losses if the borrower is unable to pay back the loan.
This also benefits borrowers, as they may opt for early payment of interest in cash, thereby minimizing the compounded payout at maturity.
[7] Towards mid-2013, PIK toggle loans returned in force as the high-yield bond market in the United States and, to some degree, Europe shifted into high gear.
The Financial Times interpreted the use of a high-risk PIK bond to be indicative of "the level of risk that debt investors are willing to tolerate as they seek higher yields in hot credit markets".
[1] PIKs are typically unsecured (i.e., not backed by a pledge of assets as collateral) and/or are characterized by a deeply subordinated security structure (e.g., third lien).
Typically, refinancing PIK loans in the first years is either completely restricted or comes at a high premium (i.e. prepayment protection) to meet the internal requirements of investing funds.