Market Rate Approach

Any of a number of methods that sets a cramdown interest rate by reference to an interest rate determined in a commercial market (such as the prime rate, the treasury bill rate, or federal funds rate). Many bankruptcy courts have ruled that a secured creditor who does not accept the plan is entitled to interest on its secured claim at a “market rate,” but the courts disagree on the precise definition of “market rate” and the methodology for determining the “market rate.”

In the most frequent application of the market rate method, courts treat the plan as creating a “forced loan” by the lender and then set the cramdown interest rate at the rate that the lender would receive in the open market for making a loan of similar duration and risk. This version of the market rate approach is referred to as the forced-loan approach or coerced loan approach (see Coerced Loan Approach). Some commentators and practitioners imprecisely use the terms “market rate approach” and “coerced loan approach” as if interchangeable, probably because the coerced-loan approach is the method most often used by courts that subscribe to the idea that the cramdown rate should be linked to a market rate of interest.

See also Coerced Loan Approach, Cost of Funds Approach, Cramdown, Cramdown Interest Rate, Forced Loan Approach, Formula Approach, Presumptive Contract Rate Approach, Prime Plus Formula Approach, Treasury Plus Formula Approach.

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