PIK Interest Clause
(Bilateral Credit Agreement)

Summary

This PIK Interest Clause (Bilateral Credit Agreement) (also known as a capitalized interest clause) presents a set of provisions in a bilateral loan agreement under which all or a portion of the interest payable by a borrower may be capitalized for all or part of its term. This clause includes practical guidance, drafting notes, and an alternate clause. Payment-in-kind (or PIK) refers to a loan where the borrower is allowed to make interest payments in forms other than cash. PIK financing is more commonly found in leveraged buyout transactions, and depending upon the situation, the payment of interest is often made by issuing other debt or by the issuance of warrants. In the clause below, PIK interest will be payable by adding the amount of interest due onto the principal of the loan on each interest payment date, rather than paying it in cash. Lenders will set forth varying parameters around when and to what extent accrued interest may be, or is required to be, capitalized and added to a loan's principal balance. This clause provides sample language to include in a bilateral loan agreement between one lender and one (or more) borrower(s) that requires or allows the borrower(s) to pay interest by capitalizing accrued amounts and adding them to principal. This clause may be read in conjunction with the following practice notes and clauses: • Loan and Security Agreement (Bilateral) • PIK Interest Clause (Syndicated Credit Agreement) • Payment in Kind (PIK) Toggle Clause • Bridge Financing and Facilities in Private Equity