This bug was fixed in the package cloud-initramfs-tools - 0.29ubuntu1

---------------
cloud-initramfs-tools (0.29ubuntu1) yakkety; urgency=medium

  * overlayroot: support 'overlay' filesystem explicitly rather than
    relying on ubuntu specific kernel module 'overlayfs'.  (LP: #1493188)

 -- Scott Moser <smo...@ubuntu.com>  Fri, 23 Sep 2016 17:00:37 -0400

** Changed in: cloud-initramfs-tools (Ubuntu Yakkety)
       Status: Fix Committed => Fix Released

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https://bugs.launchpad.net/bugs/1493188

Title:
  "overlayfs" no longer exists

Status in cloud-initramfs-tools:
  Fix Committed
Status in cloud-utils:
  Confirmed
Status in cloud-initramfs-tools package in Ubuntu:
  Fix Released
Status in cloud-utils package in Ubuntu:
  Confirmed
Status in cloud-initramfs-tools source package in Xenial:
  Confirmed
Status in cloud-utils source package in Xenial:
  Confirmed
Status in cloud-initramfs-tools source package in Yakkety:
  Fix Released

Bug description:
  As mentioned in LP: #1411294, it's now called 'overlay' instead of 
'overlayfs'.
  Ubuntu had patched the kernel for compatibility.

  The Ubuntu kernels as of 4.8 (16.10 kernel) and possibly a bit before
  no longer have a overlayfs module either.  Thus, this is now affecting
  yakkety.

  
  (The original reporter is @~gpo-9.)

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