As a result of the meltdown of the financial markets, lenders are severely constricting new credit facilities and refusing to renew expiring facilities. The Bankruptcy Code's chapter 11 provides a powerful mechanism for an otherwise viable business to restructure and extend its outstanding debt and in many cases, reduce interest rates on loan facilities.

The modification of an existing credit facility in a bankruptcy case over the objection of a lender is typically accomplished through a "cramdown plan." "Cramdown" means, simply, obtaining confirmation of a chapter 11 plan of reorganization over the objection of one or more dissenting classes of creditors. Often, the objecting creditor is the pre-petition lender holding a loan which the debtor seeks to modify. This technique has been used in countless bankruptcy cases to save businesses large and small.

Cramdown plans are governed by section 1129(b) of the Bankruptcy Code, which allows confirmation of a plan if "the plan does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan" despite objections from creditors and other parties. Thus, the debtor must convince the bankruptcy court that the proposed plan is fair and equitable despite objections. So long as the plan provides that a secured lender will retain its lien and receive deferred cash payments equal to the present value of the collateral securing the loan, the judge may find the plan fair and equitable. Generally, this means that payments must be made at a market rate of interest, which may be substantially less than is required under the loan documents.

We can expect to see the volume of chapter 11 cases continue to increase over the next several months. A business looking to restructure its debts may wish to investigate these options and others in further detail.