FMO and CDC invest in Indian debt provider

As the debt market in India becomes increasingly popular with GPs, the development finance institutions have backed Au Financiers directly in a $60m funding round.

London-based CDC Group and Netherlands-based FMO have backed Au Financiers, an India-based private debt provider, according to a company statement. They join existing investors ChrysCapital and Warburg Pincus. 

FMO led the latest investment, injecting $40 million, while CDC invested $20 million. 

The investments are expected to expand the company’s commercial vehicle finance business and grow in new business areas such as lending to small and medium-sized enterprises. The facility will directly contribute to the creation of 2,000 jobs at Au Financiers as well as thousands more through its client base of SMEs, according to the statement. 

India’s financial sector consists of more than 400 banks and over 12,000 non-bank finance companies, according to CDC. While urban areas are generally well-serviced, rural and semi-rural areas, where 65 percent of the population lives, are often heavily under-served and non-bank finance companies play an important role in providing financial services in these areas.

Private equity firms ChrysCapital and Warburg Pincus, as well as the International Finance Corporation, have previously backed Au Financiers. In February 2012, Warburg acquired a $50 million stake in the business, with ChrysCapital joining as an investor this February by taking a 10 percent stake for $22 million. 

These firms are indirectly tapping into the private debt market that is becoming increasingly popular in India due to the lack of financing available to SMEs from traditional sources. Kohlberg Kravis Roberts, ICICI Venture, Apollo Global Management and SSG Capital are just a few of the firms with funds targeting debt opportunities. 

Vishakha Mulye, chief executive of ICICI Venture, explained to Private Debt Investor sister title Private Equity International earlier this month that many companies had borrowed heavily while India’s growth rate was very strong. But having overestimated earnings growth at the time, they now faced having to refinance that debt, leading to a widespread need for new sources of credit in the country. 

She added, “Many of these companies in the last decade borrowed foreign currency convertible bonds (FCCBs) in the international market – the total value of FCCBs expected to fall due in the next three years is around $42 billion. Many of these were borrowed at the rate of INR 45 to the US doller, but today the rupee is at INR 55.” 

Those borrowers all expected the bonds to be converted, and so booked them as equity, she explained. Today, that is a problem because many have been unable to meet debt payments that they had not envisaged having to make at this stage.