What is a Backup Line?

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

How Does a Backup Line Work?

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 Does a Backup Line Matter?

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.