Cram Up Definition - Investopedia

A cram up is when junior creditors impose a cramdown on senior creditors during a bankruptcy or reorganization, forcing them to accept the terms. Investing InvestingEssentials Partof Bankruptcy PartOf Bankruptcy ExploreTheGuide Overview BankruptcyBasics Overview WhatYouNeedtoKnow WhentoDeclareBankruptcy TheseDebtsAren'tDischarged ShouldYouFile? 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Acramupiswhenjuniorclassesof creditors imposea cramdown—whichallowsbankruptcycourtstoignoreobjectionsbycreditorstorecognizedebts—onseniorclassesofcreditorsduringabankruptcyor reorganization.Ifenoughjuniorclasscreditorsagreetothetermssetbyacompanyseeking refinancing,theycanforceholdoutstobeboundtotheagreement,whichresultsincramminguptherefinancing.Seniorclassesofcreditorsareforcedtoaccepttheterms,eveniftheyarenotasgoodastheoriginaldeal. KeyTakeaways Acramupiswhenjuniorcreditors forceadebtplanonseniorcreditorsduringabankruptcyor reorganization. Ifenoughjuniorcreditorsagreetothetermssetforthbyacompanyseeking refinancing,theycanforceholdoutstobeboundtotheagreement.Therearetwoprimarycramupmethods:reinstatementandindubitableequivalent.A pivotalrulingintheChapter11proceedingsof CharterCommunicationsin2009providedlegalsupport forcramups. UnderstandingaCramUp Tobetterunderstandacramup,itishelpfultofirstdefinecramdowns.Thecramdownprovision,outlinedinSection1129(b)oftheBankruptcyCode,permitsabankruptcycourttoignoretheobjectionsofasecuredcreditorandapproveadebtor'sreorganizationplanaslongasitis"fairandequitable." Ineffect,acramupisareversecramdown.Ratherthanabankruptcyreorganizationbeingforcedoncertaingroupsofcreditorsbythecourt,juniororsubordinatedcreditorsforcetermsofareorganizationonothercreditorsthatmaybeholdingupthereorganization. Seniorsecured creditorsmay pursueanassetsale—whichwouldresultinenough proceedstosatisfytheirowndebtbutcanreduceornegateasignificantrecoveryforjuniorcreditors—orarenegotiationoftermsduetochangesincircumstances. Acramupreorganizationplanwouldrestructureasecureddebtwithouttheconsentof lendersbypayingthedebtinfullovertime. Inacramup,acompanyfacing bankruptcy cannotforcecreditorstoacceptcompromisestotheirclaimsoutsideofthecourtroom,butthecreditorsthemselvescanagreetotheterms. TypesofCramUps Therearetwoprimarycramupmethods:reinstatementandindubitableequivalent. Reinstatement Inareinstatementcramup,thematurityofdebtiskeptatthepre-bankruptcylevel,debtcollectionisdecelerated,andthedefaulteddebtis"cured."Lendersarecompensatedfordamages,butthetermsofthedebtarekeptthesame. Indubitableequivalent Anindubitableequivalent,whichismorecommonlyused,involvespayingastreamofcashpaymentstocreditorsequaltotheamountdue.Whilethisishappening,creditorsmaintaintheirliens,whichcanmakeitdifficultforapost-restructuringcompanytomaintainthefundsnecessaryforworkingcapital. Acramupcanalsobereferredtoasdebtreinstatement. HistoryofCrampUps Thecramupmethodofdebtreinstatement sawsignificantgrowthduringtheaftermathoftheGreatRecession.Intheyearsleadinguptotherecession,manycompaniestookadvantageofeasyaccesstocredit,buildingupmountainsofdebt. Then,whentherecessionhit,lendingactivityevaporatedandexistingfinancingsmadeearlierbecameprohibitivelyexpensive. Inresponse,someChapter11borrowerssetouttodeleveragetheirbalancesheetsbyreinstatingfavorableloans. RealLifeExampleofaCramUp A pivotalrulingintheChapter11proceedingsof CharterCommunicationsin2009providedlegalsupport forcramups.Thetelecommunicationsandmassmediacompany filedforpre-arrangedbankruptcyinMarch2009,armedwitharestructuringplaninaccordancewithjuniorlenders,toeraseabout$8billionofitsdebtandreinstate$11.8billioninseniordebt. Laterthatyear,inNovember,CharterCommunication'sbankruptcyplanwasapproved,despitetheobjectionsofmanyofitsseniorlenders.Thestrategyconsistedoflockinginhugeamountsofdebtatbelowmarketinterestrates. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. BloombergLaw.“TheToolbox:CramdownandtheAbsolutePriorityRuleUnderSection1129(b).”AccessedJuly24,2020. ThomsonReutersPracticalLaw.“CramUp.”AccessedJuly24,2020. UnitedStatesHouseofRepresentatives.“Chapter11—Reorganization.”AccessedJuly24,2020. Reuters.“DebtLoadPushesCharterintoBankruptcy.”AccessedJuly24,2020. Bloomberg."ChartertoEmergeFromBankruptcyonorAboutNov.30.”AccessedJuly24,2020. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. 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