Talk:Cram down

Comments

I think the NYTimes definition is a little oddly formulated / inaccurate. This definition I think is the most idiomatic one in my experience.

Further, the idea that "value is reduced" is not correct--since the possibility of a cram down is know from the beginning, the "value" is not reduced, just the payout on bankruptcy. While the payout might be less than par (or what one class of creditors wants), the debt would normally be trading at a discount prior to the cram down, so the "value" might be unaffected by the cram down.

If you want to take a crack at a rewording, have at it. Otherwise I may get around to it in a few days.

Rgds Bongomatic 22:01, 14 January 2009 (UTC)

To your first point re: the NYT definition, while I agree the debt / bankruptcy is the most commonly used definition currently, the New York Times is a reputable source and if they use that definition then I think it is worth noting, unless there are a preponderance of sources that specifically excludes that usage.

I don't think it should be excluded, but feature articles in particular (the author of that "Year In Ideas" blurb is not a business reporter) do not carry as much weight on technical financial definitions. While there is a prohibition on original research, editorial discretion on what to highlight in order to present the most useful definition would seem well advised. Bongomatic 00:06, 15 January 2009 (UTC)

Regarding the rduction of value - I have to disagree. Whenever a potential adverse event with probability less than 100% converts into an actual adverse event, there is loss of value. Let's say I make a $100 loan to a business that then under bankruptcy protection for reorganization. I estimate that there is a 50% chance the judge will cram down my loan to $70, and a 50% chance that the loan will eventually be repaid after the company emerges from bankruptcy. At that point my loan is worth 100 - 30*50%, or $85. If, then, the judge actually does cram down my loan, it's only worth $70 - a loss in value of $15 from immediately beforehand. Of course, if the company goes to liquidation rather than reorg, it's not really a cram down - nobody tells me I have to reduce my loan amount, I just receive less than par when the company's assets are liquidated and the BK judge pays out to my class of creditors X cents on the dollar. Bantman (talk)

"Value" has lots of meanings. Most financial investors would consider "market value" the most relevant, rather than "theoretical value", which is what you describe.

My experience with distressed debt investments (which may be original research, but nonetheless informs my opinion on this) is that investors are not willing to pay the probability-weighted expected outcome. Rather, they are willing to pay a price lower than the worst outcome they think is reasonably likely to occur. By the time a cram-down occurs, this expected outcome is generally priced into the market. Bongomatic 00:06, 15 January 2009 (UTC)

Any substantial variance between what you label "theoretical value" and market value is an opportunity for arbitrage, and per efficient market theory should be quickly eliminated. Regarding your experience - it depends what you define as "reasonably likely". If that is approaching 100% certainty, then I see what you are saying; otherwise there is always another party that is thinking "but if things go well, I'll get a big return on this..." and bidding up the price - equilibrium should be at the market's probability-weighted expected value.Bantman (talk)

Either way, the cramdown doesn't per se reduce value, just claim--as you point out, the price of the paper relative to the result of the cramdown will determine whether value is reduced or increased. I think the straightforward description of what the court does in a cramdown is probably the most accurate and least subject to interpretation or nitpicking. I hope you like what I've done with the article (it was lucky I ran across the Bloomberg glossary, as separating the two usages out was hovering in the back of my mind, but I wouldn't have figured it out on my own). Bongomatic 23:17, 15 January 2009 (UTC)

Missing information

This article is lacking information about how cram-downs are used for vehicle. I plan to add it. I am not an attorney. --David Tornheim (talk) 20:27, 6 May 2016 (UTC)