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."
Breaking Down Cram-Up
To better understand a cram-up, it is helpful to first define cramdowns. The bankruptcy code's "cramdown" statute (Section 1129(b) of the Bankruptcy Code) affords debtors with significant leverage to impose reorganization plans on recalcitrant secured lenders. 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 prefer either an asset sale, which would result in enough proceeds to satisfy their own debt (but which 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. A pivotal ruling in the Chapter 11 proceedings of Charter Communications in 2009 provided legal support for cram-ups. Such debt reinstatement has been found to be a legitimate method for restructuring balance sheets around senior secured credit facilities by rendering them unimpaired, according to Bloomberg Law Reports. For more on what makes a successful cram-up, see this summary of two cram-up cases.