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ARTICLE · 02 APRIL 2020

10 Things For Lenders To Think About When Capitalizing Interest

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In the current environment, lenders and banks may wish to be supportive of their borrower clients who are looking to protect cash flow. One way of doing that might be to allow the borrower to capitalize interest...

CanadaFinance and Banking
Christopher Alam
Christopher Alam
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In the current environment, lenders and banks may wish to be supportive of their borrower clients who are looking to protect cash flow. One way of doing that might be to allow the borrower to capitalize interest (also referred to as Payment-In-Kind or PIK) for a period of time. Here are ten things to think about when considering a PIK arrangement.

  • Dollar limits

If any security (guarantees, mortgages, hypothecs or otherwise) is dollar limited, then as principal debt increases, ensure that such limits are increased appropriately. In any case guarantors should acknowledge the change to the credit.

  • Financial covenants

Financial covenants may have to be adjusted. A Debt to EBITDA covenant, for example, may have to be relaxed as principal debt increases.

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