EXCLUSIVE: 'Pushing The Problem Down The Road': Experts Sound Alarm On Private Credit's PIK Surge

The growing use of payment-in-kind (PIK) interest in private credit is raising questions about borrower financial health, particularly as more companies defer cash payments and push debt obligations further into the future.

PIK allows borrowers to pay interest by adding it to their outstanding loan balance rather than making cash payments. While the structure can help companies manage short-term cash flow pressures or finance growth, experts warn that it becomes more concerning when borrowers rely on it because they cannot afford their debt payments.

"I’m more concerned about borrowers repeatedly extending or capitalizing interest without any meaningful improvement in cash flow," Nick Panize, president of Westgate Capital Ventures, told Benzinga in an interview.

In private lending, cash flow is one of the clearest indicators of a borrower’s financial health, Panize said. When companies consistently cannot cover interest payments, it can point to underlying financial stress rather than simply a financing strategy.

PIK Loans Show Signs Of Stress

The trend is showing up in broader private credit data. Moody’s found that PIK income accounted for roughly 8% of gross investment income at public business development companies (BDCs), up from approximately 5.5% in 2021.

Moody’s said the increase could signal growing pressure on borrower cash flow, although PIK usage alone does not necessarily indicate financial distress.

Data from Corridome, a database tracking private equity firms, lenders and deals, offers another indication of the potential risks.

Founder Alex Stepansky told Benzinga that an analysis of June 30, 2026 filings from eight large BDCs found that 48.7% of the par value of first-lien loans due by 2030 with a PIK component was marked below 90 cents on the dollar. For comparable cash-pay loans, the figure was just 6.4%.

The par-weighted mark on near-term PIK loans was 85.2 cents, compared with 97.2 cents for cash-pay loans, Stepansky said, adding that the pressure is concentrated in PIK loans approaching maturity, when borrowers that deferred interest must refinance larger balances.

New Lending Shows A Different Picture

Not all the data points to accelerating PIK usage. A new analysis from Kroll and StepStone found that PIK-bearing loans accounted for 2.9% of new-issue par value in its global first-lien benchmark, the lowest level since January 2017.

The firms also found that PIK represented 2% of interest income on newly originated loans, compared with 4.7% across outstanding loans in the same global benchmark at the end of the second quarter.

The figures suggest lenders may be exercising greater caution when structuring new loans, even as existing portfolios carry more PIK exposure.

Buying Time, Not Solving The Problem

Vinod Chandiramani, partner and head of capital advisory at Solomon Partners, said increased PIK usage is "likely" a warning sign, but investors need to distinguish between financing structured with PIK from the beginning and borrowers switching to it after running into trouble.

Some companies use PIK to fund growth or complete a refinancing with a clear path toward stronger cash flow. Others have few financing alternatives and are seeking relief from immediate interest payments.

Lenders may agree to restructure interest rather than force an immediate default, Panize said, but that can simply delay the problem.

"Ultimately, you’re just pushing the problem further down the road unless the borrower’s cash flow improves," he said.

Panize does not expect PIK alone to trigger a broad default wave, but said sustained increases could signal further credit deterioration ahead.

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