Debt Download
September 22, 2023

Debt Download

Welcome to Debt Download, Goodwin’s monthly newsletter covering what you need to know in the leveraged finance market.

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Holdco PIK loans and other forms of debt with interest that is paid “in-kind” (as opposed to paid in cash), while always available as a source of financing, have been more prevalent since the Federal Reserve began raising interest rates in March of 2022 in light of the increased cash interest expense for traditional senior debt. Recent trends and points of negotiation in Holdco PIK facilities include:

  • Loan Party Structure – The definitive documentation is typically structured as a note purchase agreement (as opposed to a credit or loan agreement) with an “Issuer” (as opposed to a borrower) that will generally be a holding company that sits outside the credit group for any senior debt, which means the Holdco PIK loan will not increase leverage under any senior debt.
  • PIK Interest – Interest on Holdco PIK Loans is capitalized at a to-be-negotiated frequency – most often quarterly, although the frequency can also be monthly, semi-annually, annually (in rare instances) and, where the interest rate is not fixed but is based on a floating rate such as SOFR, on the last day of each applicable interest period. The capitalized portion of the interest is added to the total outstanding principal amount of the loan on each capitalization date, and the new, increased principal balance will accrue interest which will be capitalized on the next capitalization date and added to the principal, and so on, and so on. In some cases, lenders will give the borrower the option for a cash pay toggle where the borrower is able to pay interest in cash in exchange for a small discount on the interest rate, or, conversely, a cash pay loan may have a PIK toggle that gives the borrower the option to pay interest in-kind for a premium – care should be taken to ensure that the correct default – cash pay or PIK – is selected, otherwise unknowing borrowers may miss a required notice period and be forced to pay interest in cash, or in-kind with a premium. When considering a cash pay toggle for a company that otherwise has a senior credit facility, it is important to consider whether those cash interest payments would be permitted to be made on Holdco PIK loans under that senior credit facility.  If the Holdco PIK borrower sits outside of the senior credit group, that cash will have to be distributed up and so there will need to be sufficient capacity to do so under any senior credit documents.
  • Maturity – The maturity on a Holdco PIK loan is often longer than the maturity of a traditional senior term loan. If a company has senior debt, the Holdco PIK loan should mature outside of the maturity of that senior debt to ensure the Holdco PIK loan can be repaid when it becomes due, as it will otherwise typically be restricted from being repaid under the applicable senior debt documents.  Care should be taken to ensure that any Holdco PIK loan with a maturity date in excess of five years is vetted from a tax perspective to ensure maximum deductibility of interest expense.
  • Mandatory Prepayments and Call Protection – Mandatory prepayments typically will be required on Holdco PIK loans in connection with a change of control, IPO or acceleration of the loans under any senior credit facility. It is common for the call protection applicable to the Holdco PIK loans to be higher than what Sponsor and other borrowers may expect for senior credit facilities, including the inclusion of a make-whole premium due on any prepayments made within the first year or two that the debt is outstanding, with a more typical call protection formulation kicking in thereafter.
  • Covenants – The same or similar affirmative and negative covenants that are applicable to senior credit facilities are also often applicable to Holdco PIK Loans. In cases where the borrower has a senior credit facility in place, the baskets and thresholds set forth in the covenants may have cushions to the senior agreement baskets and thresholds, usually set at 15-25%. The covenants usually apply to the borrower and all restricted subsidiaries of the borrower. There is often no financial covenant applicable to Holdco PIK loans, and if there is, or for any incurrence-based ratios, a point of negotiation tends to be whether to include the capitalized portion of any interest in calculating the leverage ratio or whether the borrower can exclude that amount.
  • Guarantors/Security – Traditional Holdco PIK loans are typically unsecured and subsidiaries of the borrower do not act as guarantors of the Holdco PIK loan.

In Case You Missed It – Check out these recent Goodwin publications: Second Circuit Rules that Syndicated Loans Are Not “Securities” Under State and Federal Law; SEC Adopts Expansive (Albeit Slightly Softened) Private Funds Rules; The SEC’s New Private Fund Rules on Preferential Treatment: How Do They Compare With the AIFMD?; and Till We Meet Again: Eighth Circuit Weighs in on Appropriate Interest Rate in a Cramdown.


For inquiries regarding Goodwin’s Debt Download or our Debt Finance practice, please contact Dylan S. Brown, Nikolaus J. Caro, and Robert J. Stein.

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