Hi all,
Let's assume the following for my question:
Loan with a mix of periodical cash interest payment/PIK accrual
- Cash Coupon Interest: 3% annually
- PIK Interest: 3% annually
- Starting Loan Balance: $100
As the 1st year ends, PIK interest is accrued and the year-ending balance is $103. Cash interest payment for the 1st year was $3 ($100 x 3%. Balance doesn't change until the very end.)
For the 2nd year, is the cash coupon interest payment $3 (3% applied to the balance without PIK accrual) or $3.09 (3% applied to the balance + PIK accrual)?
Thank you
The loan is PIK'ed up at 3%, so you now have to repay a principal of $103. Your cash payment is a function of your principal, so you now have to pay $3.09.
Think about it this way: Under your scenario with a unique loan, if your debt balance goes down, the interest paid also decreases. If your balance increases, the interest repayment must go up.
If you had two distinct tranches (e.g. TLA and Mezz), assuming the Mezz is paid in kind for the sake of the example: - The TLA balance and cash interest repayment would decrease over time - The Mezz balance and non-cash interest payments would increase
Hope it helps! Camondo
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