Barrier
What Is a Back Stop?
In corporate finance and investment banking, a screen (or backstop) is to give final retreat support or to make a bid in a securities offering for the unsubscribed portion of shares.
At the point when a company is trying to raise capital through an issuance — and needs to guarantee the amount received through the issue — it might get a barrier from an underwriter or a major shareholder, for example, a investment bank, to buy any of its unsubscribed shares.
How a Back Stop Works
A barrier functions as a form of insurance. While not an actual insurance plan, a company can guarantee that a certain amount of its offering will be purchased by specific organizations, for the most part investment banking firms, in the event that the open market doesn't deliver an adequate number of investors and a portion of the offering goes unsold.
Assuming the organization giving the screen is an investment banking firm, sub-underwriters addressing the investment firm will go into an agreement with the company. This agreement is alluded to as a firm-responsibility underwriting deal or contract, and it offers overall help for the offering by resolving to purchase a specific number of unsold shares.
By going into a firm-responsibility underwriting agreement, the associated organization has guaranteed full responsibility for the quantity of shares determined in the event that they initially go unsold, and vows to give the associated capital in exchange for the accessible shares.
This gives assurance to the issuer that the base capital can be raised no matter what the open market activity. Also, all risk associated with the predefined shares is effectively moved to the guaranteed organization.
On the off chance that the offering is all purchased through customary investment vehicles, the contract committing the organization to purchase any unsold shares is delivered void, as the conditions encompassing the guarantee to purchase never again exist.
The contracts between an issuer and the underwriting organization can take different forms. For instance, the underwriting organization can furnish the issuer with a revolving credit loan to help credit ratings for the issuer. They may likewise issue letters of credit as guarantees to the entity raising capital through offerings.
Special Considerations
On the off chance that the underwriting organization claims any shares, as determined in the agreement, the shares have a place with the organization to oversee as it sees fit. The shares are dealt with the same way as some other investment purchased through normal market activity. The responsible company can impose no limitations on how the shares are traded.
The underwriting organization may in this way hold or sell the associated securities per the regulations that administer the activity overall.
Illustration of a Back Stop
In a rights offering, you might see a statement to this effect: "ABC Company will give a 100 percent fence of up to $100 million for any unsubscribed portion of the XYZ Company rights offering." If XYZ is trying to raise $200 million, yet just raises $100 million through investors, then ABC Company purchases the remainder.
Features
- A barrier is the act of giving final hotel support or security in a securities offering for the unsubscribed portion of shares.
- At the point when a company is trying to raise capital through an issuance, it might get a screen from an underwriter or a major shareholder, for example, an investment bank, to buy any of its unsubscribed shares.
- Fences function as a type of "insurance" and support for the overall offering, guaranteeing that the offering doesn't fail in the event that all shares are not subscribed.
FAQ
What Are Volcker Rule Backstop Provisions?
The Volcker Rule is a set of financial regulations that isolates the commercial and investment banking activities of a firm. Its purpose is to forestall conflicts of interest and unfair practices to the impediment of a bank's customers. One provision of the Rule is to forestall the backstopping of a securities issue by an underwriting bank on the off chance that it will make a conflict of interest. Besides, a screen would be disallowed if it could "result, straightforwardly or in a roundabout way, in a material exposure by the banking entity to a high-risk asset or a high-risk trading procedure; or represent a threat to the safety and sufficiency of the banking entity or to the financial stability of the United States."
Who Are Backstop Purchasers?
On the off chance that the underwriting bank or investment banking syndicate can't or don't have any desire to fence another issue, third-party backstop purchasers might be called upon to step in and buy any unsubscribed portion of a securities issue. These purchasers might give a bid substantially below the issue price or potentially may demand fees as compensation. They would then frequently try to sell off the holdings over the long haul at a profit.
What Is a Back Stop in a Bond Issue?
Like the barrier in an equity placement, a fence for a bond issue is a type of guarantee by which the underwriting bank or syndicate will fix a price at which to purchase any unsold or unsubscribed bonds.
