Recent years have witnessed a proliferation of new types of debt securities. Amongst these, PIK-Toggle bonds give a borrower the choice between rolling over coupon payments by issuing additional bonds or paying the coupon in cash. These bonds are often characterized as ‘’covenant light’’. In a setting where there is asymmetric information about the borrowers’ cash flows and a possibility of diversion, we show that a PIK-Toggle bond is an optimal contract for financially constrained firms that restructure their operations. A PIK-Togggle contract serves as a screening device so that firms with high cash flows choose regular coupon debt while viable firms with temporary low cash flows choose PIK-Toggle debt to raise funds to restructure.