A liquidity facility, such as a letter of credit or a standby bond purchase agreement, is a backup source of funding an issuer may use to purchase its own bonds when they cannot quickly be sold to new investors.
For example, when interest rates rise, investors may exercise a put option and require an issuer to buy back its bonds, typically at the bonds’ par value. If the bonds cannot be immediately remarketed to new investors, the issuer will have to come up with the funding to purchase them; the issuer may not have enough funding available, however, or may need those funds for another purpose. With a liquidity facility, the entity providing the facility, likely a bank, buys the bonds, or gives the issuer money to buy the bonds, until they can be remarketed.