standby commitment

Standby commitment

An agreement between a corporation and investment firm that the firm will purchase whatever part of a stock issue that is offered in a rights offering that is not subscribed to in the two- to four- week standby period.

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Standby Agreement

An agreement between the issuer of a security and its underwriters stating that the underwriters are responsible for any unsold portion of the issue. That is, the underwriters agree to buy the remainder of a new issue if they are unable to place its entirety with investors. This transfers the risk of the unsold portion of the issue from the issuer to the underwriters. This guarantees that the issuer will raise the capital it intends to raise, but leaves the underwriters with the possibility that they must purchase an issue with low value. As a result, underwriters charge a standby fee for a standby agreement. It is also called firm commitment underwriting or a backstopped deal.

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standby commitment

A lender's promise to make funds available to a borrower for a specified period of time.Different from a line of credit because the standby does not contemplate a revolving relationship in which the borrower obtains money, repays some or all of it, and then has that same amount of credit available again for new borrowings.The standby is intended to be drawn down and then repaid according to normal promissory note terms.The most typical use is when a developer needs a takeout loan—permanent financing that will “take out” the construction loan—in order to obtain a construction loan. Rather than lock in possibly high interest rates and prepayment penalties for permanent financing,the developer will pay a fee for a standby commitment.When the project is completed,the developer can then elect to fund under the standby and then wait and see if interest rates drop or if it will sell the project rather than retain it, or proceed with permanent financing.