Backstop Purchaser

What is ‘Backstop Purchaser’

An entity that agrees to purchase all the remaining, unsubscribed securities from a rights offering. The backstop purchaser provides security to the issuing firm by guaranteeing that all of the newly issued shares will be purchased, allowing the company to fulfill its fundraising requirements.

Explaining ‘Backstop Purchaser’

Just as a backstop in baseball prevents a ball from leaving the playing field, a backstop to an offering insures that the funds required by the firm are raised.

Backstopping can cost companies large fees when participating in a rights offering. Similar to an underwriter, the backstop purchaser takes on the risk of issuing new securities and is paid a premium for compensation. For example, when Berkshire Hathaway acted as a backstop purchaser for USG Corporation, it earned a non-refundable fee of $67 million for the service.

Further Reading

  • Government Intervention through an Implicit Federal Backstop: Is There a Link to Market Power? – [PDF]
  • Corporate commercial paper, note issuance facilities, and shareholder wealth – [PDF]
  • Counterproductive proposals on euro area reform by French and German economists – [PDF]
  • Electricity derivatives and risk management – [PDF]
  • When safe proved risky: Commercial paper during the financial crisis of 2007-2009 – [PDF]