Backup Line of Credit

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Backup Line of Credit

A bank assurance of funds obtained by an issuer of commercial paper to protect the CP investor from default. The issuer pays a commitment fee to the bank.

Backup Line of Credit

A bank's guarantee of an issuer's commercial paper. Commercial paper is a short-term, unsecured debt security usually issued by a company with a very high credit rating. As a result, commercial paper is very low-risk. The backup line provides additional security for the paper, but usually does not provide credit for the full value of the paper. The issuer pays a fee to the bank for the backup line.
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The runoff in commercial paper significantly reduced the demand for commercial paper backup lines of credit, which are provided mainly by large commercial banks.
Believing that commercial paper backup lines of credit were unlikely to be drawn down and that, even if drawn, they were unlikely to result in a loss, many large banks reportedly offered backup lines to some borrowers at very favorable terms.
Unlike backup lines of credit, typical drawn business loans are profitable in themselves, but spreads on larger syndicated loans, especially those to investment-grade firms, tend to be quite narrow.