The evolution of structured credit in India's mid-market

Bank retrenchment from complex mid-market exposures has created a structural gap that private credit is now filling, and the terms available to a borrower in that gap depend almost entirely on how the facility is structured before it is shown to anyone.

Three things moved at once. Provisioning pressure on stressed assets made credit committees slower to clear anything that required a judgement call on security. Basel III capital requirements raised the internal cost of holding a lumpy, low-rated exposure on a bank book. Tightened co-lending guidelines narrowed the route by which a bank could take a share of a facility a non-banking financial company had originated. None of these was aimed at mid-market borrowers. Together they removed the mid-market borrower from the set of exposures a bank branch is rewarded for writing.

What replaced it is not a like-for-like substitute. Credit funds, alternative investment funds and the larger non-banking financial companies now hold most of the ₹25 to 150 crore structured exposures being written in India. They price differently, they diligence differently, and most importantly they underwrite a different thing. A bank underwrites a borrower. A credit fund underwrites a cash flow and the security that sits around it.

A bank underwrites a borrower. A credit fund underwrites a cash flow and the security that sits around it.

What this changes for a borrower

The practical consequence is that the rating conversation matters less than it did, and the security conversation matters more. A borrower rated BBB with a clean, ring-fenced receivable and a workable escrow will clear a credit fund's investment committee faster than an unrated borrower with a stronger balance sheet and nothing identifiable to charge. This inverts the order in which most finance teams prepare for a raise.

It also changes what a borrower should have ready. In a bank process the pack is financial: audited statements, projections, the existing debt schedule. In a structured credit process the pack has to answer a narrower question, which is what the lender is actually secured against and what happens to that security in a downside. That means a charge position on every existing facility, the covenant tests currently live and the headroom under each, the escrow mechanics on any receivable already trapped, and a clear statement of what is unencumbered.

Where the terms are decided

Pricing is the visible variable and it is rarely the one that determines the cost of a facility. The terms that decide it are the disbursal mechanism, the trapping events, the intercreditor position relative to existing lenders, and the conditions precedent. A facility priced 150 basis points inside a competing offer can be materially more expensive if it disburses against milestones the borrower does not control, or if the trapping events are drawn widely enough that working capital is swept in an ordinary bad quarter.

This is why the sequence matters. A borrower who approaches lenders first and structures second is negotiating the structure in the room, against a counterparty who does this weekly. A borrower who fixes the instrument, the tenor, the security package and the disbursal mechanism before any approach is negotiating only price.

The distribution problem

One further effect of the shift is that wide circulation now costs a borrower more than it used to. Bank syndication tolerated a broad approach because the participating banks were pricing off a common rating. In private credit the lenders have different mandates, different ticket ranges and different views on the same security. A facility shown to twenty funds is repriced by the least interested of them, and the fact of the circulation itself becomes a data point about the borrower.

The approach list for a structured mid-market facility is usually between four and eight names. Selecting it requires knowing which funds are currently deploying into the sector, what they are able to hold, and which of them will actually clear a structure of this shape at investment committee rather than agreeing at term sheet and withdrawing at documentation.