Cramdown and the Cramdown Interest Rate

What this topic is

Cramdown is confirmation of a chapter 11 plan over the objection of a dissenting impaired class. Section 1129(b) permits it if the plan does not discriminate unfairly and is fair and equitable. For a secured class, fair and equitable means one of three specific things: retention of the lien plus deferred payments with a present value equal to the collateral, a sale free and clear with credit bidding and liens attaching to the proceeds, or the indubitable equivalent. The first route requires a discount rate, and that rate, the cramdown rate, is one of the most consequential and least settled numbers in restructuring.

Why it matters

On a $400m secured claim stretched over seven years, the difference between a 6% rate and a 9% rate is worth tens of millions of dollars in present value. It is transferred from one class to another by a judicial finding, on a methodology that differs by circuit and that the Supreme Court has addressed only in a plurality opinion about a used truck. Everyone at the table is negotiating against a number that nobody can predict with confidence, which is exactly why understanding the frameworks matters.

Who should learn it

Secured lenders and distressed debt investors facing a reinstatement or extension plan, debtors and sponsors structuring an exit, restructuring lawyers and financial advisers, and anyone modelling recoveries where the plan currency is a note rather than cash.

What you will understand

• The three statutory routes to cramming down a secured class, and why RadLAX closed the escape hatch
• The formula approach from Till, the efficient-market approach, and the two-step method some circuits apply
• The §1111(b) election and why an undersecured creditor might give up its deficiency claim
• How unfair discrimination, the best-interests test, and the accepting-class requirement fit around cramdown

Prerequisites

• Chapter 7 Explained
• Covenant Breach and What Follows

Common misconception

"Cramdown means the creditor gets less than it is owed." Not for a secured class under the deferred-payment route. That route requires the creditor to retain its lien and to receive payments whose total nominal amount equals its allowed secured claim and whose present value equals the value of the collateral. What the creditor loses is not principal but time, optionality, and the right to say no. The entire fight is over the discount rate used to prove that present value, and over the valuation of the collateral that sets the size of the secured claim in the first place.