Stretching Leverage: Holdco PIK Financing Instruments

Key Points

• Holdco PIK financing instruments may present an attractive and/or alternative source of capital for private equity sponsors to finance acquisitions or to facilitate dividend recapitalisations.
• Creditors attracted to the higher yield typically offered by these instruments need to understand the increased risks involved in holding such instruments—in particular, their structurally subordinated position in the capital structure and lack of any meaningful control over the activities of the corporate group or its financing providers.

Holdco payment-in-kind financing instruments (Holdco PIKs) have become increasingly prevalent both in leveraged acquisition financing structures and transactions facilitating dividend recapitalisations. This article considers the key features of these instruments, the benefits which they offer to financial sponsors as well as the risks that creditors of such instruments should be aware of in a downside scenario.