Hidden Risks of Payment-in-Kind Emerge for Investors
Payment‑in‑kind loans have become a staple of private‑credit markets, but recent bankruptcies suggest the relief they offer can hide mounting balance‑sheet strain.
GoHealth’s collapse illustrates the danger
When Chicago‑based GoHealth Inc. filed for Chapter 11 bankruptcy on June 7, the company’s troubles had been evident for two years. The health‑insurance marketplace entered a payment‑in‑kind (PIK) agreement to defer cash interest payments during a critical Medicare enrollment period. The arrangement kept cash flowing, but it also added the unpaid interest to the principal balance.
Liquidity soon eroded, and Medicare Advantage pressures persisted. By late 2023 the lenders placed GoHealth’s loans on nonaccrual status. When the bankruptcy filing arrived, the PIK structure had simply turned a cash‑flow problem into a larger debt load. Valued at $6.6 billion, the firm ran out of runway.
Blue Owl Capital, a major private‑credit manager, was among the lenders. Neither Blue Owl nor GoHealth responded to requests for comment.
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PIK deals are spreading across sectors
GoHealth is not an isolated case. P3 Health Partners restructured its term loan into a cash‑and‑PIK format, which now supports $380 million of long‑term debt at double‑digit rates. Software firm Pluralsight, owned by Vista Equity Partners, ended up in a lender‑led restructuring that wiped out equity after private‑credit lenders, including Blue Owl, could not contain the debt burden.
Unicus Research founder Lakshmi Ganapathi described PIK as “a double‑edged sword.” Borrowers enjoy flexibility in good times, yet under stress the compounding principal becomes a balance‑sheet problem. She noted a “through‑line” across borrowers who defer obligations, whether through PIK, amendments, or other liability‑management moves.
In a post‑bank‑crisis environment of higher rates and tighter underwriting, private credit has filled the gap left by traditional banks. The very features that make it nimble—speed, confidentiality, and the ability to tailor covenants—also allow PIK loans to accumulate with limited public disclosure.
Grays Peak Capital’s chief executive Scott Stevens says his firm avoids PIK altogether, paying only cash interest. He attributes his firm’s clean record to that policy, noting that “we’ve had no defaults.” The September bankruptcy of First Brands Group, an auto‑parts supplier, followed the introduction of a PIK‑based option, highlighting how quickly deferred‑interest arrangements can become embedded in stressed credits.
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Critics argue the opacity of private‑credit markets poses systemic risk. Some suggest that, if private credit is playing a bank‑like game, it should be subject to similar regulatory oversight.
Legal experts counter that private credit draws capital from sovereign wealth funds, pension plans, and insurance companies—investors already subject to regulation and capable of assessing risk. Applying bank‑style rules, they say, would be an “apples‑to‑oranges” comparison that could stifle innovation, especially in sectors like defense financing where flexibility is prized.
Ganapathi points to the collapse of UK bridge lender Market Financial Solutions as a cautionary tale. After alleged fraud and double‑pledging of assets, losses cascaded up the chain to larger institutions. She likens the situation to Japan’s lost decade, where banks extended credit to insolvent borrowers while avoiding mark‑to‑market accounting, delaying inevitable losses until the system buckled.
Regulators face a dilemma: impose stricter rules that might curb the growth of private credit, or allow the sector to continue operating with limited oversight, risking a buildup of hidden liabilities. As interest rates stay higher for longer, the pressure on borrowers that rely on PIK structures is likely to increase, making the next wave of defaults a possibility that market participants cannot ignore.
