What Is a Cram Up?
A cram up is when junior classes of creditors impose a cramdown—which allows bankruptcy courts to ignore objections by creditors to recognize debts—on senior classes of creditors during a bankruptcy or reorganization. If enough junior class creditors agree to the terms set by a company seeking refinancing, they can force holdouts to be bound to the agreement, which results in cramming up the refinancing. Senior classes of creditors are forced to accept the terms, even if they are not as good as the original deal.
- A cram up is when junior creditors force a debt plan on senior creditors during a bankruptcy or reorganization.
- If enough junior creditors agree to the terms set forth by a company seeking refinancing, they can force holdouts to be bound to the agreement.
- There are two primary cram up methods: reinstatement and indubitable equivalent.
- A pivotal ruling in the Chapter 11 proceedings of Charter Communications in 2009 provided legal support for cram ups.
Understanding a Cram Up
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 can 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.
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.
Types of Cram Ups
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.
A cram up can also be referred to as debt reinstatement.
History of Cramp Ups
The cram up method of debt reinstatement saw significant growth during the aftermath of the Great Recession. In the years leading up to 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 earlier became prohibitively expensive. In response, some Chapter 11 borrowers set out to deleverage their balance sheets by reinstating favorable loans.
Real Life Example of a Cram Up
A pivotal ruling in the Chapter 11 proceedings of Charter Communications 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 the objections of many of its senior lenders. The strategy consisted of locking in huge amounts of debt at below market interest rates.