Cram-Down Deal: What It Is, How It Works

What Is a Cram-Down Deal?

A cram-down deal refers to a situation where an investor or creditor is forced into accepting undesirable terms in a transaction or bankruptcy proceedings. It can be used as an alternative to the term "cram down." It has come into use as an informal catch-all for any transaction that involves investors being forced into accepting unfavorable terms, such as a sale at a low price, financing that dilutes their ownership share or which is especially expensive, or a debt restructuring that places them in a subordinate position.

It's used less frequently as a way of describing when a bankruptcy court initiates a reorganization plan that for an individual or company despite objections from creditors, that order or plan has been "crammed down," as in "down the throats of the creditors."

Understanding Cram-Down Deals

The term "cram-down deal" can be used in several situations in finance, but consistently represents an instance where an individual or a party is forced to accept adverse terms because the alternatives are even worse. In a merger or buyout, a cram-down deal may come as the result of an offer or a transaction in which the target company is in a troubled financial state. 

An example of a cram-down deal would be where a stockholder is forced to accept below-investment-grade debt in a transaction involving the reorganization of a company because cash or equity is not an option. While junk debt is less desirable than cash or equity, it is better than nothing. 

Cram-Down Deal Reasons

Cram-down deals tend to occur when a business or entity that is in charge of managing an investment has made a mistake that has resulted in significant enough losses that it does not have the ability to pay back all of its creditors or otherwise cannot meet its obligations. Cram-down deals are also common in individual and corporate bankruptcy proceedings. 

Cram-Down Deal and Pensions

While the concept of cram-down deals and the idea of having no choice but to accept unfavorable terms in a transaction is not new, the prevalence of cram-down deals has increased in recent years.

One context where cram-down deals may be seen is in bankruptcies involving corporations that offer defined-benefit pensions. Troubled companies in older industries, such as airlines or steel, may have neglected to fully fund their pensions. Upon declaring bankruptcy, such companies will usually opt to turn their pension plan administration over to the Pension Benefit Guaranty Corp. (PBGC), which may cover only a portion of their pension obligations. That leaves workers who are entitled to full pensions with the choice of having to accept only a portion of what they are rightfully owed—a cram-down deal.