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CLOs take their PIK

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News and Analysis

CLOs take their PIK

Victoria Zhuang's avatar
Michelle D'Souza's avatar
  1. Victoria Zhuang
  2. +Michelle D'Souza
•6 min read

US CLO managers have recently come under pressure to embrace greater PIK-ification in loans.

They’re being nudged to offer PIK more often at origination, grow the size of PIK baskets, or get around PIK basket restrictions by exempting loans more easily from those baskets, according to 9fin sources.

PIK assets have been around in middle-market CLOs, but they are now cropping up with greater regularity in BSL deals. The heavy competition for scant new loans this past year has given sponsors freer rein to demand flexibility, just as they’ve done with lobbying for cov-lite features in loans.

However, these developments are raising questions from investors over the long-term impact that creeping PIK features could have on CLO portfolios.

A PIK toggle feature can offer short-term liquidity relief for borrowers, and the opportunity to grow faster. But it also increases their total debt burden, potentially leading to higher default risk down the line. Unsurprisingly, PIK options have often figured in liability management exercises, as our distressed debt colleagues covered recently.

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