Trading with PIK Facility

4.9 Trading with PIK Facility

A PIK loan is a type of loan that does not involve any cash flows from the borrower to the lender, between the drawdown date and the maturity date. Trades involving PIK always need to have the quotation method specified as ‘Flat’.

For trades involving the PIK component, the following three scenarios are possible:

Tranche has partial availability of the PIK amount
Tranche has no availability of the PIK amount
Tranche has sufficient availability of the PIK amount

If the PIK allocation has already happened before the trade is booked, there is not any separate trade processing for the PIK portion. PIK also is treated as part of normal trade amount.

If the PIK happens in the agency, resulting in a commitment increase, the commitment increase details are handed off to Loans QT with the indication that the increase in the commitment is due to PIK. The commitment increase due to PIK is considered at a prize equal to zero except for origination trades, where it is considered at price equal to 100. Loans QT sends an internal deal to Oracle Banking Corporate Lending to the extent of the commitment increase and settled position gets updated with the PIK amount. This internal trade is booked and settled immediately in SLT. For a buy deal, the costing details are updated and for a sell deal the PnL entries are updated. For open trades, Loans QT sends trade amendments to the extent of PIK amount. During settlement, the PIK amount is not considered as it is priced at zero.

If the PIK changes in the agency do not result in commitment increase, the existing settled position remains unchanged. For open trades, the funded portion increases by the PIK amount and the unfunded portion decreases by the PIK amount.

Note:

Delayed compensation fee is not applicable for PIK trades, as they are always quoted as Flat.
PIK is applicable only for drawings in the trade currency.

Parent topic: Processing an SLT Contract