BROWSE

Backup Line

What is 'Backup Line'

A line of credit used by a bank to cover any issue of commercial paper for which financing from new paper may not be available. A backup line of credit effectively provides an alternate source of liquidity for the issuer and a source of credit for the purchaser. Backup lines usually take the form of a confirmed letter of credit or contractual facility.

Explaining 'Backup Line'

The amount of backup line generally ranges from 50 to 100%, depending upon the quality of the paper issued. Lower grade paper usually get greater coverage and vice-versa. These lines of credit are usually paid for with either compensating balances or else with a simple straight fee.


Further Reading


Are banks still important for financing large businesses?
papers.ssrn.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

Bank lines of credit in corporate finance: An empirical analysisBank lines of credit in corporate finance: An empirical analysis
academic.oup.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

Bank lending during the financial crisis of 2008Bank lending during the financial crisis of 2008
www.sciencedirect.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

The impact of financial intermediation on economic growth: The Nigerian perspectiveThe impact of financial intermediation on economic growth: The Nigerian perspective
papers.ssrn.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

Getting up to speed on the financial crisis: a one-weekend-reader's guideGetting up to speed on the financial crisis: a one-weekend-reader's guide
www.aeaweb.org [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

A Backup Quarterback View of Mezzanine FinanceA Backup Quarterback View of Mezzanine Finance
onlinelibrary.wiley.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

Structured investment vehicles: the unintended consequence of financial innovation: some reasonable ideas and objectives combined to have unexpected effectsStructured investment vehicles: the unintended consequence of financial innovation: some reasonable ideas and objectives combined to have unexpected effects
go.gale.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …

Liquidity risk and syndicate structureLiquidity risk and syndicate structure
www.sciencedirect.com [PDF]
… the firm's borrowing rate cannot exceed the rate guaranteed by the backup line of credit, the backup line of credit … In response to the default, commercial paper issuers began establishing backup lines of credit with banks to … 2 CURRENT ISSUES IN ECONOMICS AND FINANCE …



Q&A About Backup Line


Does this apply if there was no deflation during a certain time period?

Yes, this would still apply even if there was no deflation during a certain time period as long as there were periods where prices fell below their normal levels over time .

Why are they called backup lines instead of primary lines?

Because they serve as backups when primary sources fail to supply sufficient funds needed by issuers during times when there is high demand on short-term funding markets due to economic uncertainty or crisis situations such as war or natural disasters etc...

Who pays for these lines?

Usually banks pay for them with compensating balances or else with simple straight fees.

What is inflation (narrowly speaking)?

Inflation (narrowly speaking) is when prices are rising above their long term trend line.

Are there different types of backup lines besides confirmed letters and contractual facilities ?

Yes ,there are other kinds too like standby letters , standby credits , standby guarantees .

What range do these lines usually fall into?

The amount ranges from $5 million to $1 billion depending upon quality and grade.

What is reflation?

Reflation is an act of stimulating the economy by increasing the money supply or reducing taxes, seeking to bring the economy back up to the long-term trend, following a dip in the business cycle.

What is a backup line of credit?

A backup line of credit is a line of credit used by a bank to cover any issue of commercial paper for which financing from new paper may not be available.

Is this true for all goods and services?

No, it only applies to goods and services that have been affected by deflation during a certain time period. It does not apply to all goods and services across all industries/sectors of an economy.

How do you calculate reflation?

You calculate reflation by adding 6% per year for one year after deflation has occurred.

How does it provide a source of credit for the purchaser?

It provides a source of credit to the purchaser because if there are no funds available in their account, then they can use this as collateral and borrow money from the bank.

Why does this occur?

This happens because there must be enough growth in order for prices to catch up with their previous level before they can continue on at that new level.

How does it effectively provide an alternate source of liquidity for the issuer?

The backup line provides an alternate source of liquidity for the issuer because it allows them to borrow money if they need more money than what they have already raised.

What do these lines usually take form as?

They usually take form as confirmed letters or contractual facilities.

Where are they used most often?

They are used mostly in Europe, Asia, Latin America and Africa.

How does reflation differ from inflation (narrowly speaking)?

Reflation differs from inflation narrowly defined because it only occurs after a period of deflation and seeks to return prices back up to their long term trend line.

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