PIK (pay in kind) toggle bonds permit a bond issuer to unilaterally decide to pay one or more of its interest payments in cash or additional bonds.
This feature enables a bond issuer to avoid a payment default if it is unable to pay interest in cash when due.
Because many bonds have few other covenants which would trigger default and bring a bond issuer “to the table” to work with bondholders to restructure the credit arrangement, a PIK toggle bond may deteriorate more before an event of default occurs, reducing the recovery amount.
PIK toggle bonds typically offer investors a higher interest to compensate for the greater risk involved.
PIK toggle bonds, which were common before the financial meltdown of ’08/’09, have now become common again.
I’ve provided links to several helpful articles below:
Practical Law Definition: http://us.practicallaw.com/7-382-3690
Wall Street Journal Article: http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-361349/