Private Equity Makes Loan Payments With More Debt to Keep Cash
- Payment-in-kind debt shows up in LBO terms to clinch deals
- Usage soars as a temporary fix until interest rate spike eases
PE firms including Carlyle Group are using payment-in-kind to buy or refinance some companies.
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Private equity titans are dusting off an old gambit to cope with the rising cost of interest on their leveraged buyout loans: Don’t pay cash.
Instead, they’re making payments with more debt, preserving liquidity for now with the promise of a bigger payoff later when the debts mature. Those “payment-in-kind” loans don’t always come cheap — the annual interest runs as high as 16% — but lenders and borrowers are wagering that they’ll refinance when rates come down long before the due date.