Ikarugamycin is a member of the polycyclic tetramate macrolactams (PTMs) family of natural products with diverse biological activities. The biochemical mechanisms for the formation of polycyclic ring systems in PTMs remain elusive. The enzymatic mechanism of constructing an inner five-membered ring in ikarugamycin is reported. A three-gene-cassette ikaABC from the marine-derived Streptomyces sp. ZJ306 is sufficient for conferring ikarugamycin production in a heterologous host. IkaC catalyzes a reductive cyclization reaction to form the inner five-membered ring by a Michael addition-like reaction. This study provides the first biochemical evidence for polycycle formation in PTMs and suggests a reductive cyclization strategy which may be potentially applicable in general to the corresponding ring formation in other PTMs.