Toggle Note --An Innovative way to keep defaulters low !!.!!

A PIK Loan is a type of loan which typically does not provide for any cash flows from borrower to lender between the drawdown date and the maturity or refinancing date, not even interest thus making it an expensive, high-risk financing instrument. PIK (payment in kind) is to be interpreted as interest accruing until maturity or refinancing. Toggle note is such a payment-in-kind bond, where the issuer has the option to defer an interest payment by agreeing to pay an increased coupon in the future. With toggle notes, all deferred payments must be settled by the bond's maturity.

Payment-in-kind Toggle notes is becoming an increasingly important part of the arsenal of private-equity firms as they pile debt on their corporate trophies. These "PIK toggle" securities allow borrowers to make a choice. They can keep paying interest on a bond, or they can defer paying interest until the bond matures, and in the process agree to pay an interest rate that is effectively higher. These Toggle notes provide firms with a way to raise debt while staying afloat during times of strained cash flow. When cash is at a minimum, the firm can use the toggle to defer an interest payment.

While this seems like an attractive option for the firm, it does come at a cost. The increased interest rate provides ample incentive to not miss an interest payment. But such new features are definitely in the interest of investors, because they help companies avoid default and complex bankruptcy proceedings.