European PIK loan facilities
Produced in partnership with Susan Whitehead, Consultant at Hogan Lovells and Penny Angell, Partner at Hogan Lovells
European PIK loan facilities

The following Banking & Finance guidance note Produced in partnership with Susan Whitehead, Consultant at Hogan Lovells and Penny Angell, Partner at Hogan Lovells provides comprehensive and up to date legal information covering:

  • European PIK loan facilities
  • Key features of a PIK facility
  • PIK terminology
  • PIK facilities—risk and yield
  • What are the advantages of PIK facilities for Sponsors?
  • PIK facilities—main documentary protections

This Practice Note provides information on European PIK loan facilities (PIK facilities). It discusses:

  1. the key features of PIK facilities, including a typical transaction structure

  2. key terminology

  3. the risk and yield involved in PIK facilities

  4. why PIK facilities may be attractive to the sponsor, and

  5. main documentary protections for PIK lenders

Key features of a PIK facility

What is a PIK facility?

A ‘PIK’ loan facility generally refers to a loan where all of the interest is capitalised throughout the life of the facility.

In Europe, this type of debt is most commonly seen in the financial sponsor-backed leveraged finance market, as a facility lent to a sponsor’s portfolio business.

PIK facilities—transaction structure

The PIK loan will usually be lent to a PIK Holdco within the Sponsor’s portfolio group. PIK Holdco will usually be the immediate holding company of the Parent company. The Parent company is the top company within the part of the group which comprises the ‘banking group’ for the purposes of the senior debt package. This is illustrated below.

Simplified diagram of European Leveraged Finance Facilities incorporating PIK debt

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The proceeds of a PIK facility may be drawn in full on closing to help to fund the acquisition of the target group (or to help to refinance acquisition facilities). Occasionally, it may be lent to fund a dividend recapitalisation for