One of the methods that bankruptcy courts use to set the cramdown interest rate that a bankruptcy plan must provide to a secured creditor that does not accept the plan. Under the formula approach the court starts with a base rate and then adjusts that rate upward by assessing the risk associated with the facts of the case.
The rates that courts have primarily used to determine the base rate are the prime rate (referred to as the “prime plus formula approach”) and the rate on a United States Treasury instrument (referred to as the “treasury rate formula approach”).
The risk premium is determined by reference to such factors as the debtor’s credit history, the nature of the collateral, the length of repayment, and the viability of the reorganization plan.
See also Coerced Loan Approach, Cost of Funds Approach, Cramdown, Cramdown Interest Rate, Forced Loan Approach, Market Rate Approach, Presumptive Contract Rate Approach, Prime Plus Formula Approach, Treasury Plus Formula Approach.