Backstop Allocation
Backstop Allocation is the portion of a restructuring financing assigned to Backstop Parties after ordinary subscriptions, oversubscription and other offering allocations are applied under the transaction documents.
How it works
A backstopped financing commonly follows an allocation waterfall. Basic Subscription Rights are exercised first, eligible oversubscription requests can absorb part of the remaining securities, and Backstop Parties purchase the residual amount required by their commitments. Agreements can also grant backstop investors guaranteed, direct or premium allocations separate from the pure residual purchase.
The residual amount follows the subscription process
The backstop typically absorbs securities the broader eligible-holder process does not purchase.
Commitment percentages divide the residual pool
Backstop Parties can be assigned stated percentages or maximum amounts, with special rules if one investor defaults.
Direct allocations can sit beside the residual backstop
Some transactions guarantee the backstop group a stated purchase amount independent of ordinary under-subscription.
Oversubscription can reduce the residual
A successful oversubscription process can shrink the amount Backstop Parties must fund.
Worked example: commitment shares
Three Backstop Parties cover 50%, 30% and 20% of an $80 million residual allocation. Their required purchases are $40 million, $24 million and $16 million absent adjustments.
Why final ownership can change materially
A larger Backstop Allocation can leave the committing investors with substantially more New Common Equity than the base subscription model assumed.
Common mistakes
Assuming backstop investors receive only the leftover securities; ignoring direct allocations; treating commitment percentages as final ownership percentages; and failing to model oversubscription first.
Example
A $300 million offering receives $180 million of basic subscriptions and $40 million of valid oversubscription allocations. The remaining $80 million becomes the residual Backstop Allocation, divided among the Backstop Parties under their commitment percentages.
Example
A $300 million offering receives $180 million of basic subscriptions and $40 million of valid oversubscription allocations. The remaining $80 million becomes the residual Backstop Allocation, divided among the Backstop Parties under their commitment percentages.
Professional note
Read the allocation waterfall carefully. The Backstop Allocation can include more than a simple leftover pool if the agreement gives committing investors direct allocations, premium rights or priority participation.
Related terms
- Backstop Commitment
A Backstop Commitment is a contractual undertaking by one or more investors to purchase securities or interests not subscribed for by eligible participants in a restructuring financing, helping assure the targeted capital raise will be funded.
- Backstop Party
A Backstop Party is an investor that enters into a Backstop Commitment to purchase unsubscribed securities or interests in a restructuring financing, subject to the applicable commitment agreement.
- New Common Equity
New Common Equity is common ownership issued by a Reorganized Debtor or successor under a Chapter 11 plan, often distributed to creditors, sold for new capital or reserved for management and other plan constituencies.
- Oversubscription Allocation
Oversubscription Allocation is the method used to distribute securities remaining after Basic Subscription Rights are exercised among eligible holders that validly request additional securities through an Oversubscription Privilege.
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