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 澳洲幸运5官方开奖结果体彩网:bankruptcy or 澳洲幸运5官方开奖结果体彩网:reorganization. If enough junior class creditors agree to the terms set by a company seeking 澳洲幸运5官方开奖结果体彩网:refinancing, they can force holdouts to be bound to the agreement, w✅hich 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.

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 澳洲幸运5官方开奖结果体彩网:bankruptcy court to ignore the objections of a 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:restructure a 澳洲幸运5官方开奖结果体彩网:secured debt without the consent of lenders by paying the debt in full over time.

Types of Cram Ups

There are two primary cram up methods: reinstatement and in🐠dubitable equivalent.

Reinstatement

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.

Indubitable equivalent

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 澳洲幸运5官方开奖结果体彩网:working capital.

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 澳洲幸运5官方开奖结果体彩网:the recession hit, lending activity evaporated and existing 澳洲幸运5官方开奖结果体彩网:financings made earlier became prohibitively expensive. In response, some 澳洲幸运5官方开奖结果体彩网:Chapter 11 borrowers set out to deleverage their 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:interest rates.