Equity Commitment Premium
An Equity Commitment Premium is consideration granted to investors for committing new equity capital to a restructuring transaction, commonly as part of a backstop or committed rights-offering financing.
How it works
The term is used in restructuring practice for compensation tied to the commitment of capital rather than solely to securities actually purchased. Depending on the transaction, the premium can be paid in cash, shares, discounted securities or another form. Its economic function can resemble a Backstop Fee, but transaction documents may use different labels and calculation bases.
The premium compensates capital commitment
Investors receive consideration for reserving capital and assuming the risk that they may need to fund a large residual subscription.
The calculation base matters
The premium may be calculated on total commitment, funded amount or another negotiated base.
Equity payment creates dilution
When the premium is paid in shares, the cost is borne through dilution rather than an immediate cash outflow.
The premium belongs in the full financing package
Its reasonableness should be assessed with purchase discount, expense reimbursement, termination rights and other protections.
Worked example: percentage of committed amount
A 7% premium on a $500 million commitment represents $35 million of stated compensation before considering how the equity used for payment is valued.
Why terminology can mislead
Two transactions can use different labels for similar compensation, while identical labels can hide different formulas.
Common mistakes
Assuming commitment premium always means cash; treating the premium as purchase price; comparing headline percentages without the calculation base; and ignoring dilution.
Example
Investors commit to backstop a $500 million equity financing and receive New Common Equity equal to 7% of the committed amount as an Equity Commitment Premium, subject to confirmation and funding conditions.
Example
Investors commit to backstop a $500 million equity financing and receive New Common Equity equal to 7% of the committed amount as an Equity Commitment Premium, subject to confirmation and funding conditions.
Professional note
Use the document’s defined term. Backstop Fee, commitment premium and similar labels can describe related economics but may use materially different formulas or legal provisions.
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.
- 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 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.
- 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.
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