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.
How it works
Backstop commitments are common in Chapter 11 rights offerings and other new-money financings. The backstop parties agree, subject to negotiated conditions, to purchase unsubscribed securities up to specified commitment amounts. The commitment can reduce execution risk but often comes with fees, expense reimbursement, allocation rights and termination protections.
The backstop addresses under-subscription risk
Without a backstop, a rights offering can raise less cash than the plan requires. The commitment shifts part of that execution risk to the backstop parties.
Commitments can be allocated among investors
Each investor may commit to a stated percentage or amount, while the agreement specifies how defaulting commitments and excess allocations are handled.
Conditions precedent matter
Funding can depend on confirmation, Effective Date conditions, required approvals and consistency between the final plan and the agreed financing.
The commitment can carry valuable economics
Backstop parties can receive fees, premium allocations, expense reimbursement or other consideration for assuming funding risk.
Worked example: partial subscription
Eligible holders subscribe for $210 million of a $300 million offering. The backstop parties fund the remaining $90 million under their commitment percentages.
Why creditors care
A credible backstop can make Plan Funding more certain, while expensive terms can transfer meaningful value to the committing investors.
Common mistakes
Calling every large subscription a backstop; assuming the commitment is unconditional; confusing the commitment with the securities purchased; and ignoring termination rights.
Example
A Reorganized Debtor needs a $300 million equity raise. Eligible creditors receive Subscription Rights. A lender group agrees to purchase any portion not subscribed by other participants, subject to the Backstop Commitment Agreement.
Example
A Reorganized Debtor needs a $300 million equity raise. Eligible creditors receive Subscription Rights. A lender group agrees to purchase any portion not subscribed by other participants, subject to the Backstop Commitment Agreement.
Professional note
The backstop is a financing contract, not a guarantee that every Effective Date condition will be satisfied. Review funding conditions, termination rights, commitment caps and plan-change protections.
Related terms
- Rights Offering
A rights offering gives existing shareholders subscription rights to purchase newly issued securities, usually in proportion to current ownership.
- Equity Commitment Letter
An equity commitment letter is a contract under which a sponsor, fund or other equity investor commits to contribute a specified amount of equity capital to an acquisition vehicle, subject to the letter’s stated conditions.
- Plan Funding
Plan Funding is the cash, financing, asset-sale proceeds, retained liquidity, new investment or other resources used to satisfy distributions, administrative obligations and implementation costs required by a Chapter 11 plan.
- Plan Securities
Plan Securities are debt, equity, warrants or other securities issued or distributed as part of a Chapter 11 plan to implement the restructuring, fund the plan or provide consideration to creditors and interest holders.
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