Vol. 2 Supplement — March 2026

PIK & Roll-Up Risk

The disconnect between reported performance and underlying credit quality. Covers PIK shadow default rates (6.4% Q4 2025, up from 2.5% in 2021), EBITDA add-back inflation, covenant erosion, PE-backed bankruptcies, and interest coverage deterioration. Sources: Lincoln International, S&P, Fed FSR, Fitch.

Vol. 2 Supplement — PIK & Roll-Up Risk

The Disconnect: PIK, Inorganic Growth & Shadow Defaults

Thesis

PIK interest added via credit agreement amendment — Lincoln International's "bad PIK" — functions as a shadow default signal. At 6.4% of par as of Q4 2025, it has more than doubled since Q4 2021. When combined with covenant-lite structures and inflated EBITDA add-backs, lenders are systematically underreporting stress in their portfolios.

Roll-Up Deal Flow & PIK Shadow Default

EBITDA Add-Backs & PE Bankruptcies

Covenant Erosion & ICR Distribution

Index Tables & Case Studies

Supplement Page 2 — Case Studies & Regulatory

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