Deficiency Agreement

The term “backstop” originated in the 1800s, and referenced cricket and baseball. It was a term that was created to describe the fence area behind a catcher that would keep the ball from getting lost, should it get past the catcher.

In financial terms, a deficiency agreement serves as a backstop for financing by a third party, which kicks in if a company’s or project’s cash flow and ability to make its payments winds up with a shortfall.

The third party may be an investor or some other entity with a financial or business relationship with the company. Industries with erratic cash surplus positions, such as the oil and gas industries, will use deficiency agreements to protect their companies from default risk when energy prices drop.