standby underwriting

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.

standby underwriting

An agreement by underwriters to purchase the portion of a new securities issue that remains after the public offering. Standby underwriting eliminates the issuer's risk of not selling the issue out, but it increases the investment bankers' risk.
References in periodicals archive ?
The equity raise is subject to a standby underwriting agreement with RBC Capital Markets, Jefferies Group LLC and KBW Inc, which was announced in February.
For the remaining amount, a syndicate of banks consisting of Credit Agricole Corporate and Investment Bank, Handelsbanken Capital Markets, Nordea Bank AB and Swedbank AB, together the joint global coordinators, have entered into a standby underwriting commitment, subject to customary conditions
The remaining 75% is secured by a standby underwriting agreement with three banks.
The Lonmin Chairman Roger Phillimore stated via a written statement, "With the standby underwriting and amended debt facilities signed we have taken two decisive steps on our way to delivering that and we are confident about our financial security."
First I address the standby underwriting paradox described by Hansen (1989): the question of why issuing firms do not hire an underwriter on a standby basis and then set a low subscription price so that the underwriter is not required to take up shares, thus keeping costs low.
Given that an alternative form of insuring the issue, standby underwriting, has become rare in the US (10%), it is interesting that precommitments are not more widely used.
The timing and size of these declines is consistent with the transactions costs and quasi-split explanations of the standby underwriting paradox.
The vast majority of such offerings now have no standby underwriting provision.