Securities: agreement between a corporation and an investment banking firm or group (the standby underwriter) whereby the latter contracts to purchase for resale, for a fee, any portion of a stock issue offered to current shareholders in a Rights Offering that is not subscribed to during the two- to four-week standby period. A right, often issued to comply with laws guaranteeing the shareholder's Preemptive Right, entitles its holder, either an existing shareholder or a person who has bought the right from a shareholder, to purchase a specified amount of shares before a Public Offering and usually at a price lower than the Public Offering Price.
The risk to the investment banker in a standby commitment is that the market price of shares will fall during the standby period. See also Lay Off for a discussion of how standby underwriters protect themselves. See also Flotation Cost; Subscription Right; Underwrite.
Lending: a bank commitment to loan money up to a specified amount for a specific period, to be used only in a certain contingency. The most common example would be a commitment to repay a construction lender in the event a permanent mortgage lender cannot be found. A Commitment Fee is normally charged.
