Restructuring

A while back we posted a table summarizing rulings on cramdown interest rates in all the court decisions we could find.  As promised, we’ve revised the table to add some new decisions and our updated cramdown matrix is now available here.  A few observations about general trends on how the courts are determining chapter 11 cramdown interest rates after the Supreme Court’s decision in Till v. SCS Credit Corp., which decided the question in a chapter 13 case:

• There are only two Circuit Courts of Appeals – the Fifth and Sixth Circuits – to provide guidance after Till on setting the appropriate chapter 11 cramdown interest rate.
• The vast majority of bankruptcy courts have applied Till’s formula approach to chapter 11 cramdown interest rates, although some courts emphasize that they need not blindly follow Till, but should instead view it as very persuasive guidance for chapter 11 cases.
• In applying Till’s formula approach in the chapter 11 context, most courts have concluded that an efficient market for a loan substantially identical to the cramdown loan does not exist.  A prevalent reason for finding no efficient market exists for the proposed cramdown loan is the unavailability of financing with the same terms, leverage, and collateral as the proposed cramdown loan.  Access to “tiered” financing – such as a combination of first-lien, second-lien, unsecured debt and equity financing — does not indicate an efficient market exists for a secured financing of the entire amount of the proposed cramdown note.
• Those cases finding an efficient market and thus applying a market rate instead of the formula approach consider expert testimony about the availability of post-petition financing and the terms of any postpetition loan commitments made to the debtor. Courts have found efficient markets exist more frequently in cases involving hotel and commercial real estate, or, not surprisingly, in cases in which the parties agree that an efficient market exists.
• The majority of bankruptcy courts start with the national prime rate as the base rate, although some courts have chosen to adjust upwards from other common reference rates, such as LIBOR or the Treasury (T-bill) rate.  A higher risk premium may be applied to these other reference rates because they are more comparable to a risk-free rate than is the prime rate.
• Courts using the prime rate will often, but not always, remain within the 1-3% premium range recommended in Till, although they sometimes note that Till does not require them to do so. Courts often match the premium to achieve an equivalent final rate to the debtor’s proposed rate, provided that the proposed rate is reasonable.

 
Thanks to Weil summer associate David Kirk for his assistance in updating the cramdown matrix.