Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Backup Line

What it is:

A backup line is a bank promise that a commercial paper issuer will repay the maturing debt.

How it works (Example):

For example, let’s assume Company XYZ wants to issue $10 million in commercial paper. The commercial paper matures in 30 days, and there is no collateral involved; that is, the commercial paper is unsecured. To protect investors from default, Company XYZ asks its bank to provide a backup line. For a fee from Company XYZ, the bank agrees to repay the commercial paper investors if for any reason Company XYZ cannot. Banks can provide backup lines for all or a portion of a commercial paper issue, depending on the creditworthiness of the issuer.

Why it Matters:

Although only companies with the best credit ratings can issue commercial paper, having a backup line further ensures that the issuer can repay the debt if for some reason it cannot issue new commercial paper to repay the old commercial paper.

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