A standby bond purchase agreement, commonly referred to as an SBPA, is a financial instrument that provides a guarantee to bondholders that they will receive payment in the event of default. The SBPA is essentially a letter of credit between the issuer and a bank, whereby the bank promises to purchase any bonds that are not purchased by investors in the primary market.

SBPAs are typically used in situations where the issuer is unable to secure a traditional bond insurance policy. This may be due to issues with credit ratings, market volatility, or other factors that make it difficult to secure adequate insurance for the bond issuance.

The terms of an SBPA can vary depending on the specifics of the agreement. Typically, the bank will charge a fee for providing the SBPA, which may be a percentage of the bond amount or a fixed fee. In addition, the agreement will specify the duration of the SBPA, which may be for the entire life of the bonds or for a shorter period of time.

One important factor to consider when using an SBPA is the creditworthiness of the bank providing the guarantee. In the event of default, the bondholders will look to the bank to honor the SBPA. If the bank is not able to do so, the bondholders may be left without payment.

SBPAs can be a useful tool for issuers who are looking to raise capital through bond issuances. By providing a guarantee to investors, issuers can attract more capital and potentially secure better terms for the bonds. However, it is important to carefully consider the terms of the SBPA and ensure that the bank providing the guarantee is financially sound.

In conclusion, an SBPA is a financial instrument that provides a guarantee to bondholders that they will receive payment in the event of default. While it can be a useful tool for issuers, it is important to carefully consider the terms of the agreement and the creditworthiness of the bank providing the guarantee. With proper planning and execution, an SBPA can help issuers raise the capital they need to fund their projects and grow their businesses.