Pitchbook | Private Credit Borrowers Turn to Structured Capital, PIK with Debt Costs on the Rise

Feb 2023

Originally posted by Pitchbook on February 27, 2023.

Borrowers are navigating higher interest rates and input costs while earnings are slowing in many cases, and lenders are hesitant to add debt to balance sheets. As a result, structured capital, such as preferred equity and payment-in-kind interest, is becoming an increasingly attractive alternative and a way to conserve cash for both lenders and borrowers.

Christine Tiseo, Managing Director and co-head of Lincoln’s Capital Advisory Group, commented, “Certain companies right now are bringing in a layer of capital that sits between debt and equity. These are still good companies. They are typically cash flow positive. They are not candidates for bankruptcy nor are they distressed. But company performance may not be what it used to be under the current macro backdrop. With interest rates continuing to rise, it is pressuring cash flows and [the] ability to service debt or clear covenants.”

Additional structured capital themes and signs of credit stress are outlined in the original article.