What Is a Cram-Up?
A cram-up is when junior classes of creditors impose a cramdown on senior classes of creditors during a bankruptcy or reorganization. In a cram-up, a company facing bankruptcy cannot force creditors to accept compromises to their claims outside of the courtroom, but the creditors themselves can agree to the terms.
If enough junior class creditors agree to the terms set forth by a company seeking refinancing, they can force holdouts to be bound to the agreement, therefore cramming the refinancing up. Senior classes of creditors would, therefore, be forced to accept the terms, even if they are not as good as the original deal. A cram-up may also be referred to as debt reinstatement.
- A cram-up is when junior classes of creditors impose a cramdown on senior classes of creditors during a bankruptcy or reorganization.
- If enough junior class creditors agree to the terms set forth by a company seeking refinancing, they can force holdouts to be bound to the agreement, therefore cramming the refinancing up.
- There are two primary cram-up methods: reinstatement and indubitable equivalent.
- A pivotal ruling in the Chapter 11 proceedings of Charter Communications Inc. (CHTR) in 2009 provided legal support for cram-ups.
To better understand a cram-up, it is helpful to first define cramdowns. The cramdown provision, outlined in Section 1129(b) of the Bankruptcy Code, permits a bankruptcy court to ignore the objections of a secured creditor and approve a debtor's reorganization plan as long as it is "fair and equitable."
In effect, a cram-up is a reverse cramdown. Rather than a bankruptcy reorganization being forced on certain groups of creditors by the court, junior or subordinated creditors force terms of a reorganization on other creditors that may be holding up the reorganization.
Senior secured creditors may pursue an asset sale—which would result in enough proceeds to satisfy their own debt but may reduce or negate a significant recovery for junior creditors—or a renegotiation of terms due to changes in circumstances. A cram-up reorganization plan would restructure a secured debt without the consent of lenders by paying the debt in full over time.
There are two primary cram-up methods: reinstatement and indubitable equivalent.
In a reinstatement cram-up, the maturity of debt is kept at the pre-bankruptcy level, debt collection is decelerated, and the defaulted debt is "cured." Lenders are compensated for damages, but the terms of the debt are kept the same.
An indubitable equivalent, which is more commonly used, involves paying a stream of cash payments to creditors equal to the amount due. While this is happening, creditors maintain their liens, which can make it difficult for a post-restructuring company to maintain the funds necessary for working capital.
The cram-up method of debt reinstatement saw significant growth during the aftermath of the Great Recession. In the years leading up the recession, many companies took advantage of easy access to credit, building up mountains of debt.
Then, when the recession hit, lending activity evaporated and existing financings made before became prohibitively expensive. In response, some Chapter 11 borrowers set out to deleverage their balance sheets by reinstating favorable loans.
A pivotal ruling in the Chapter 11 proceedings of Charter Communications Inc. (CHTR) in 2009 provided legal support for cram-ups. The telecommunications and mass media company filed for pre-arranged bankruptcy in March 2009, armed with a restructuring plan, in accordance with junior lenders, to erase about $8 billion of its debt and reinstate $11.8 billion in senior debt.
Later that year, in November, Charter Communication's bankruptcy plan was approved, despite many of its senior lenders objecting to it—the strategy consisted of huge amounts of debt being locked in at below-market interest rates.