Backstop Fee
A Backstop Fee is consideration paid or issued to investors for committing capital and assuming the risk that they may be required to purchase unsubscribed securities in a restructuring financing.
How it works
A Backstop Fee can be paid in cash, new securities, discounted subscription rights or another court-approved form. The fee is economically separate from the purchase price paid for securities actually funded under the commitment. Courts can scrutinize the fee and related protections in light of financing need, commitment risk and available alternatives.
The fee compensates commitment rather than subscription
A Backstop Party can earn a fee for standing ready to fund even if other investors subscribe for most of the offering.
Payment form affects economics
Cash fees reduce emergence liquidity, while equity fees dilute other holders. Warrants or discounted securities create different valuation profiles.
Fee calculation needs a clear base
The percentage can apply to total committed capital, the backstopped portion or another negotiated amount.
The full package matters
The fee should be evaluated with expense reimbursement, termination rights, priority protections and any discounted investment opportunity.
Worked example: fee dilution
A $20 million equity-denominated fee is issued when Reorganized Debtor equity value is $500 million. Before other adjustments, the fee equals roughly 4% of that equity value.
Why it matters to other creditors
Fee value can dilute value otherwise available to stakeholders, while the backstop simultaneously increases confidence that the plan can close.
Common mistakes
Treating the fee as the security purchase price; comparing percentages without checking the fee base; ignoring equity dilution; and evaluating the fee apart from the commitment package.
Example
A lender group backstops a $400 million rights offering and receives a 6% commitment fee paid in New Common Equity. The stated fee value is $24 million, separate from shares purchased for unsubscribed amounts.
Example
A lender group backstops a $400 million rights offering and receives a 6% commitment fee paid in New Common Equity. The stated fee value is $24 million, separate from shares purchased for unsubscribed amounts.
Professional note
Compare the fee with the actual risk transferred. A large fee can be rational when capital certainty is scarce, but the percentage alone does not show whether the estate received fair value.
Related terms
- 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.
- 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.
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