Introduction
Carvana recorded $651 million of interest expense in 2024. It paid only $115 million of interest in cash. Most of the difference, $458 million, was payment-in-kind (PIK) interest: rather than paying its noteholders in cash, Carvana added the interest to the principal of their notes. The arrangement came out of a 2023 debt exchange that gave the company room to recover from a near-crisis, and it shows on the three statements exactly as a non-cash expense that becomes more debt.
PIK interest sits between ordinary interest and an accrual that never ends. It reduces net income like any interest expense and usually produces the same tax deduction, but it uses no cash in the period, and the obligation it creates compounds. Tracing it with the method from tracing a transaction through the statements shows how a company can conserve cash today by owing more tomorrow.
How PIK Interest Works
- Payment-in-kind (PIK) interest
Interest paid by adding it to the principal of a loan or bond, or by issuing additional notes, instead of paying it in cash. It is recorded as interest expense, increases the debt balance and accrues interest itself in later periods.
PIK features appear in several forms. Some instruments are PIK only, paying no cash interest until maturity; others are PIK toggle notes, which let the borrower choose cash or PIK each period, usually at a higher rate for PIK; and many private credit loans pay part of their coupon in cash and part in kind. They are common in leveraged buyouts, mezzanine and holding company debt, and restructurings, where preserving cash in the near term matters more than the cost of the extra debt. The broader mechanics and uses are covered in the blog's explainer on PIK interest and payment-in-kind debt.
Because each period's interest is added to principal, the balance compounds. A $1,000 loan with 12% PIK interest grows to $1,120 after one year, $1,254 after two and about $1,762 after five, all of which must eventually be repaid or refinanced. A cash-pay loan at the same rate would still owe $1,000 after five years, having paid $600 of interest along the way.
The Trace: Expense Without Cash
Suppose a company records $100 of PIK interest in a year, deductible for tax at 25%, with tax paid in cash:
Net income falls by $75, exactly as it would with cash interest. The difference is in cash: the $100 of interest is added back on the cash flow statement because none of it was paid, so cash rises by $25, the tax saved. On the balance sheet, debt rises by $100 and cash by $25; equity falls by $75. Compare a cash-pay loan, where cash would fall by $75 and debt would stay flat: the PIK structure keeps $100 more cash in the business this year at the cost of $100 more debt.
The Second Year: Interest on Interest
Suppose the $100 came from a $1,000 loan at 10% PIK. In the second year, interest accrues on $1,100, so PIK interest is $110. The trace has the same shape, scaled up: net income falls by $82.50, the $110 is added back, cash rises by $27.50, the tax saved, and debt rises to $1,210. Nothing about the business has changed, but the expense is 10% higher than a year earlier, and it will keep rising by 10% a year for as long as interest is paid in kind. That is the hidden cost of PIK on the income statement: interest expense grows on its own, depressing future earnings even if the company never borrows another dollar.
The tax assumption matters. In the United States, PIK interest on debt is generally deductible as it accrues, under the rules for original issue discount, but deductions are subject to limits such as the cap on business interest under section 163(j), and special rules can defer or disallow deductions on certain high-yield instruments with significant PIK features. A company that cannot use the deduction sees net income fall by the full $100 with no cash effect at all. The general treatment of interest, cash and non-cash, is set out in raising debt, paying interest and repaying debt.
Carvana's PIK Notes
In 2023, Carvana exchanged most of its unsecured notes for new senior secured notes due 2028, 2030 and 2031, completing the exchange with over 96% of noteholders. The new notes carried higher rates and paid interest in kind for an initial period: the first year was PIK on all three series, and the second year was a choice of cash or PIK on the 2028 and 2030 notes and PIK only on the 2031 notes. According to the company, the exchange cut total debt by more than $1.3 billion and reduced near-term cash interest by more than $455 million a year for two years. Its 2024 annual report shows the effect:
| Line item | 2023 | 2024 |
|---|---|---|
| Interest expense | 632 | 651 |
| Payment-in-kind interest added back in operating cash flow | 184 | 458 |
| Cash payments for interest | 538 | 115 |
Source: Carvana 2024 Form 10-K. Long-term debt included 185 (2023) and 105 (2024) of accrued PIK interest not yet added to principal. Net income was 150 in 2023 and 404 in 2024.
Interest expense barely changed between the two years, yet cash interest fell by more than three-quarters as the PIK provisions took full effect. The $458 million add-back is the PIK interest flowing into debt rather than out of the bank. The notes show the compounding directly: on each semi-annual payment date, the principal of each series rose by the PIK amount, and accrued PIK interest of $105 million at the end of 2024 was waiting to be added. Once its operations recovered, Carvana switched the 2028 and 2030 notes to cash interest for the period starting in August 2024 and paid it in cash in February 2025, leaving the 2031 notes as the only series still accruing in kind.
What Bankers Watch
For lenders and analysts, PIK interest changes the reading of every debt metric. Leverage rises each period by the PIK amount even if earnings are flat, so stable earnings before interest, taxes, depreciation and amortization (EBITDA) can coexist with steadily worsening net debt to EBITDA. Cash interest coverage improves while total interest coverage does not. And recoveries in a default depend on a principal balance that has grown with every PIK payment. The ratios themselves are explained in leverage and coverage ratios.
PIK From the Lender's Side
The lender's statements mirror the borrower's. A lender receiving PIK interest records interest income, which raises its net income, but receives no cash, so its cash flow statement subtracts the PIK income from operating cash flow and its loan balance on the balance sheet grows by the same amount. A lender whose income is increasingly PIK reports healthy earnings while collecting less cash, which is why private credit investors track the share of income arriving that way as a sign of borrower stress. Listed business development companies (BDCs), the funds that lend to middle-market companies, disclose the figure each year. Barings BDC, for example, reported that PIK interest and dividends made up 10.9% of its investment income in 2025, up from 9.2% in 2024, in its 2025 annual report on Form 10-K.
PIK interest is a trade between today and tomorrow. On the statements, the trade is visible in a single pattern: net income reduced as if the interest had been paid, cash preserved because it was not, and a debt balance that grows by exactly the amount left unpaid.
