Cram Up

What Is a Cram Up?

A cram up is when junior classes of creditors impose a cramdown — which permits bankruptcy courts to overlook complaints by creditors to perceive debts — on senior classes of creditors during a bankruptcy or reorganization. In the event that enough junior class creditors consent to the terms set by a company seeking refinancing, they can force holdouts to be bound to the agreement, which brings about cramming up the refinancing. Senior classes of creditors are forced to acknowledge the terms, even on the off chance that they are not comparable to the original deal.

Understanding a Cram Up

To better comprehend a cram up, it is useful to initially characterize cramdowns. The cramdown provision, framed in Section 1129(b) of the Bankruptcy Code, permits a bankruptcy court to disregard the complaints of a secured creditor and endorse a debtor's reorganization plan for however long it is "fair and equitable."

In effect, a cram up is a reverse cramdown. Instead of a bankruptcy reorganization being forced on certain gatherings of creditors by the court, junior or subordinated creditors force terms of a reorganization on different creditors that might be holding up the reorganization.

Senior secured creditors might seek after a asset deal — which would bring about sufficient returns to fulfill their own debt however can reduce or discredit a critical recovery for junior creditors — or a renegotiation of terms due to changes in conditions. A cram up reorganization plan would restructure a secured debt without the consent of lenders by paying the debt in full over the long run.

In a cram up, a company confronting bankruptcy can't force creditors to acknowledge compromises to their claims outside of the courtroom, yet the actual creditors can consent to the terms.

Types of Cram Ups

There are two primary cram up methods: reinstatement and unquestionable equivalent.

Reinstatement

In a reinstatement cram up, the maturity of debt is kept at the pre-bankruptcy level, debt assortment is decelerated, and the defaulted debt is "relieved." Lenders are compensated for damages, yet the terms of the debt are kept something very similar.

Unquestionable equivalent

An unquestionable equivalent, which is all the more ordinarily utilized, includes paying a flood of cash payments to creditors equivalent to the amount due. While this is occurring, creditors keep up with their liens, which can make it hard for a post-restructuring company to keep up with the funds essential for working capital.

A cram up can likewise be alluded to as debt reinstatement.

History of Cramp Ups

The cram up method of debt reinstatement saw huge growth during the result of the Great Recession. In the years leading up to the recession, many companies exploited simple access to credit, building up heaps of debt.

Then, at that point, when the recession hit, lending activity dissipated and existing financings made prior turned out to be restrictively costly. In response, some Chapter 11 borrowers set out to deleverage their balance sheets by reestablishing great loans.

Real Life Example of a Cram Up

A critical ruling in the Chapter 11 procedures of Charter Communications in 2009 offered legal help for cram ups. The telecommunications and mass media company petitioned for pre-arranged bankruptcy in March 2009, armed with a restructuring plan as per junior lenders, to delete about $8 billion of its debt and restore $11.8 billion in senior debt.

Sometime thereafter, in November, Charter Communication's bankruptcy plan was approved, in spite of the protests of a significant number of its senior lenders. The strategy comprised of securing in immense amounts of debt at below market interest rates.

Features

• There are two primary cram up methods: reinstatement and apparent equivalent.
• A cram up is when junior creditors force a debt plan on senior creditors during a bankruptcy or reorganization.
• A crucial ruling in the Chapter 11 procedures of Charter Communications in 2009 offered legal help for cram ups.
• In the event that enough junior creditors consent to the terms set forward by a company seeking refinancing, they can force holdouts to be bound to the agreement.