Backstopped Rights Offering: A Crucial Bankruptcy Tool
A backstopped rights offering is a type of financing transaction used in bankruptcy or restructuring scenarios, particularly in Chapter 11 cases. It allows a company to raise new capital from existing creditors or occasionally pre-petition equity holders by issuing new equity or debt securities at a discounted price.
Key Features:
- Rights Offering: The company offers its existing creditors or equity holders the right to purchase new securities (equity or debt) in the reorganized company, typically at an attractive discount to the assumed value of the reorganized company. 12
- Backstop Agreement: Certain claimants (backstop investors) commit to purchasing not only their allocated shares but also any unsubscribed shares, ensuring that the company raises the required capital. This commitment is usually made in exchange for a fee, which can be a percentage of the total rights amount. 24
- Purpose: The primary goal is to provide the company with a guaranteed source of new capital, enhancing transaction certainty and supporting the restructuring process. 1
How It Works:
- Offering: The company announces a rights offering, specifying the terms, including the price and the amount of securities available.
- Backstop Commitment: Backstop investors agree to purchase any unsubscribed shares, ensuring that the company meets its fundraising target.
- Fee: Backstop investors receive a fee, typically a percentage of the total rights amount, for their commitment. 25
- Allocation: If other creditors or equity holders do not exercise their rights, the unsubscribed shares are allocated to and purchased by the backstop investors. 4
Benefits:
- Guaranteed Capital: Ensures that the company raises the necessary capital, regardless of the participation of other creditors or equity holders.
- Enhanced Certainty: Provides greater certainty for the restructuring process, as the company can rely on the committed capital.
- Incentivized Participation: The discounted price and potential for backstop fees incentivize participation from creditors and equity holders. 2