Private credit deals go creative, lenders take cue from structures used in developed countries

Lenders in private credit space are using creative ways to structure their deals and payment terms.

Some of the deal structures are relatively new in India, though they have been extensively used in developed countries, experts said.

For instance, when Vedanta Resources raised $ 1.25 billion debt in December last year, it securitised brand fees it would receive over a three-year period from a clutch of lenders.

“Securitising brand fee is a new concept here,” said a senior executive in a consulting firm who did not want to be quoted.

Besides, some lenders in the same deal improvised on payment terms, linking most of their returns to redemption premiums, according to a report by REDD, a data and research provider.

In another major deal last year, Shapoorji Pallonji unit Goswami Infratech’s $1.7 billion bond was a zero-coupon debenture, with 18.75% return from a redemption premium.

For the loan, Shapoorji Pallonji put up significant collateral, including half of its stake in Tata Sons, two operational ports, and majority control of construction firm Afcons Infrastructure, according to media reports.

Experts said the Shapoorji debt deal was a bullet payment deal and such deals are just 10% of the total private credit deals in the market.

“Lenders are taking extra risk, hence taking bullet payments. There are very few transactions like this,” said a senior executive at an auditing firm who did not want to be quoted. Emails sent to Shapoorji Pallonji and Vedanta did not elicit any response.

That’s not all, when real-estate firm Damji Shamji raised $11 million from ASK Property Fund, it did so in a zero-coupon bond that carried an 81% redemption premium, REDD said.  Piramal Alternatives’ deal with Transaction Solutions gave it a return of 16% via compulsorily convertible debentures or equity value, whichever is higher. The Goswami Infratech bond contained both step-up clauses, and a most-favoured nation clause that would increase the pricing on the bond to match any new refinancing of bonds issued by another group unit, REDD said.

“Most lenders like to get regular coupon from borrowers, only in some cases, they want equity or premiums at the end,” the executive quoted earlier, said. Redemption premiums are charged when lenders take a bet on the business believing there is value in the business in the end, he said.

As Indian private credit market is evolving, skilled investors are bringing new structures to the country, said Bharat Gupta, debt and special situations partner, EY India.

“Some of which may have been extensively deployed in developed markets. Securitisation of income streams, bullet payments and redemption premiums are select examples of such innovation happening in India,” Gupta said.

As of now, such structures form a small percentage of overall private credit market but should increase going forward as borrowers demand greater customisation from a competitive credit market, he said.