A type of underwriting in which an investment bank commits to a worst-case price, just contrary to a bought deal underwriting (where price risk is borne by the investment bank) or best-efforts underwriting (where the issuer bears price risk). In other words, it is a rights offering where a third party (an investment bank, an underwriting syndicate, an affiliate of the investment bank or an affiliate of the issuer) undertakes, prior to the commencement of the offering, to purchase any shares or rights that remain un-exercised. A backstop commitment is a guarantee (backstop) extended to an issuer whereby it can raise the funds (capital) as planned in the offering.
This commitment (backstop/ standby) is secured by means of an agreement between an issuer and an extender of the commitment.
It is also known as an insured commitment or a standby commitment.
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