Reevaluating Risk and Return in Chapter 11 Secured Creditor Cramdowns: Interest Rates and Beyond

To confirm a chapter 11 plan over the objection of a secured creditor, the bankruptcy court must find that the plan treats the secured creditor fairly and equitably by, among other things, providing deferred cash payments with a present value of at least the amount of the secured portion of the claim. This "present value" requirement is generally understood to mean that the debtor must pay interest on deferred amounts at a rate equal to an appropriate discount rate. While there is some variation in the approaches courts use, most strive to identify the prevailing market rate for similar loans and then adjust (usually upward) to offset plan-related risks. We believe that the prevailing approaches are misguided. For one thing, the interest rates these approaches generate fail to properly balance risk and return. More broadly, by focusing solely on interest as a means of compensating and protecting crammed-down secured creditors, they blind courts to other measures that can provide fairer and more efficient risk-offsets. To achieve these ends, we advocate for redesigning the framework courts currently use. To do so, we examine the economic risks that are inherent in the secured commercial lending relationship, both in and out of bankruptcy. Drawing from this understanding, a new and more rational approach emerges that will not only protect crammed-down secured creditors but will do so without unduly threatening plan feasibility or unfairly disadvantaging other creditors. Our findings are relevant not only to cramdowns but might also contribute to a deeper understanding of secured-creditor entitlements in a broader sense.