Pacman Notes

A nickname for Payment in Kind (P.I.K.) notes – a mechanism of commercial money lending popular during the “credit binge” of the mid-2000s.

Writing in The Telegraph, Richard Fletcher explained how Payment in Kind (P.I.K.) notes work in theory, and the reality now facing some of the borrowers and lenders who used them:

The interest payments due on the [P.I.K.] notes accrued until the business was either sold or the instrument matured (typically between five and 10 years after issue). By deferring repayment cash was freed up to restructure or invest in the business.

With stock markets soaring and credit freely available neither management or investors appeared to worry about the huge compound interest bill being run up – the assumption was that the businesses would be floated or sold at huge profit long before the P.I.K. matured. …

But a few years on P.I.K. notes are now the financial equivalent of a bumbag [i.e. a fanny pack] – the fashion accessory many of us once owned but few of us want to be reminded of.

Debt traders have now dubbed them Pacman notes – “because they eat any value left in the company.”

According to Fletcher, many P.I.K. note borrowers are facing enormous compound interest charges which are unlikely to be covered by growth. Consequently, not all lenders holding P.I.K. notes can rely on being repaid.