Reinstatement Cram Ups and Charter Communication

Welcome to the thirty-third Pari Passu newsletter,

If you are surprised to hear from me on a Tuesday, you are right: this is the first edition that we do not publish on a Friday. Pari Passu has decided to write two shorter newsletters per week (one on Tuesday and one on Friday). Our content is usually pretty dense, and we want to make sure you get the most out of it.

Let’s get into today’s post.

Reinstatement Cram Ups

A few weeks ago, we learn that in an indubitable cram-up, junior classes of creditors impose a cramdown - which allows bankruptcy courts to ignore objections by creditors to recognize debts - on senior classes of creditors during a bankruptcy or reorganization. Indubitable equivalent cram-ups typically involve deferred cash payments to a secured creditor equal to the value of its debt or its collateral. 

Today, we will be focusing on reinstatement cram-ups, which are when the debtor instead rectifies its default and returns to compliance with the original terms of its debt, thus “reinstating” it. But before diving into the specifics of a reinstatement cram, let's first review some important things that happen when a company defaults on its debt and files for bankruptcy. When a debtor defaults, it can trigger an acceleration clause in the loan agreement. This clause allows the lender to demand immediate repayment of the entire debt amount rather than sticking to the original repayment schedule. 

A reinstatement involves de-accelerating the debt, meaning reversing the acceleration, so the debtor can continue repaying the debt according to the original terms and maturity schedule. It also consists of the curing of defaults. This means taking the necessary actions to fix any missed payments or violations of the terms of the debt agreement. By curing the defaults, the debtor is essentially making up for its default and returning to the original terms of the debt. A practical example of this is paying default-rate interest, which refers to an increased interest rate applied to a debt when the borrower fails to meet its payment obligations or violates the terms of the loan agreement. It is a penalty interest rate imposed as a consequence of default.

Once the debt has been de-accelerated and the defaults have been cured, the original terms and maturity date of the loan agreement can be reinstated. This is especially beneficial when interest rates have risen significantly since the original loan agreement or when the debtor has favorable loan conditions and ample time before the debt reaches its maturity date. A prime example of a reinstatement cram-up is Charter Communication's 2009 Chapter 11 filing, which we will review shortly. 

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