Banks courting corporate clients for merger and acquisition financing

Banks are pitching M&A financing to corporate clients after RBI's new norms, setting the stage for stronger competition with private credit funds

Leading domestic lenders have begun approaching their big corporate clients, including conglomerates, to position themselves for merger and acquisition (M&A) financing, after the Reserve Bank of India’s (RBI’s) norms allowing banks to fund such transactions came into effect on July 1. 

State-owned lenders are exploring tieups with foreign banks, while private-sector peers are banking on existing corporate relationships to participate in M&A financing as deals materialise. 

“We have our own corporate relationships, and our own liquidity. When the opportunity comes, we will certainly participate. We are engaging with large corporate groups and are available to finance acquisitions. We have already communicated this to our large corporate clients and conglomerates,” said a senior executive at a large private-sector bank. “We have been gaining a good share of their business over the past year, and we are hopeful that when they pursue acquisitions, they will come to us,” he added. 

The banker said lenders were still some distance from building a meaningful pipeline, as acquisition financing opportunities would emerge only when companies actively pursued deals. “If it is a cash deal and external funding is required, the company will then evaluate the best source of capital, and bank financing could be one of those options. So, it is still early in the process,” he pointed out. 

The acquisition financing norms were initially due to come into effect on April 1 but were deferred by the RBI for three months before taking effect on July 1. Under the final framework, banks can finance up to 75 per cent of an acquisition’s value, with the acquirer contributing the remaining 25 per cent. Listed and unlisted non-financial companies, along with their subsidiaries and special purpose vehicles (SPVs), are eligible to raise acquisition finance, subject to prescribed conditions. A bank’s acquisition finance exposure is capped at 20 per cent of its eligible capital base, within the overall capital market exposure limit. 

Some public-sector lenders have already begun forging overseas partnerships. State Bank of India (SBI) has entered into a strategic partnership with Japan’s MUFG Bank to collaborate on structuring and financing transactions across M&As, aviation and real estate. SBI has a lending capacity of about ₹94,000 crore under the RBI’s acquisition financing framework. 

Separately, Bank of Baroda has partnered with Mizuho Bank to jointly pursue acquisition financing, M&A advisory, structured lending, and cross-border financing opportunities. 

According to people familiar with the matter, SBI is also working with Citi on acquisition financing, although the two banks have not entered into an agreement. Other state-owned lenders are also exploring tieups with foreign banks that have deep expertise in financing such transactions. 

“Our board has approved the acquisition financing policy. With the policy now in place, we will evaluate suitable opportunities as and when they arise. We have also put in place a dedicated large corporate department to handle such proposals. If good opportunities come our way, we will participate,” said a senior executive at a state-owned bank. 

The lender has not yet partnered with a foreign bank but remains open to such arrangements, following the approach adopted by some peers, the banker said, adding, “Initially, our participation is likely to be through small-ticket transactions.” 

Bankers also expect banks’ entry into the segment to put downward pressure on pricing. “Banks will inevitably enter this segment, and that should have a moderating effect on pricing. Private credit funds have been charging as much as 17-18 per cent for acquisition financing, but as more banks participate, borrowing costs for high-quality borrowers could decline to around 10-14 per cent,” said another private-sector banker. “That said, acquisition finance is not a plain-vanilla lending business. These are highly structured transactions involving ring-fencing of cash flows, share pledges, complex financing structures and tax considerations.” 

Banks will have to build expertise in underwriting and structuring such deals, the banker said. “Larger, well-established corporations executing sizeable acquisitions are likely to prefer bank funding at lower rates, while private credit may increasingly remain focused on borrowers or transactions that fall outside banks’ risk appetite. The market is still in its early stages, but it is expected to gather momentum.” 

Moody’s said in a report earlier this month that India’s private credit market is likely to face stronger competition from banks in acquisition financing after the RBI’s framework allowing banks to finance acquisitions took effect this month. Acquisition funding has traditionally been a lucrative opportunity for private credit investors through so-called “special situations” transactions. 

It nevertheless expects the market to continue expanding, supported by strong financing demand from infrastructure, real estate and founder-led refinancing transactions. Real estate accounts for about 40 per cent of India’s private credit market by value, followed by infrastructure and utilities, the ratings firm said. 

In a recent interaction with Business Standard, Citi India chief executive K Balasubramanian noted that today, Indian banks have both liquidity and deep relationships with their corporate customers, and “their ability to finance acquisition transactions has improved significantly, and the liquidity now available to support these deals is a major positive”. 

“If you ask me, this was one source of funding that was previously unavailable to companies pursuing inorganic growth. Now that this liquidity is available, it provides an additional impetus for Indian companies to pursue acquisitions,” he added.

 

In pursuit of deals 

SBI partners MUFG: Tieup targets structuring and financing transactions across M&As, aviation & realty; also in talks with Citi 

BoB ties up with Mizuho: Partnership spans acquisition funding, M&A advisory, structured lending and cross-border financing 

Pricing to ease: Bank competition could lower borrowing costs for high-quality borrowers 

Pipeline still nascent: Banks say deal pipelines will build only as companies actively pursue acquisitions 

Pvt credit to face challenge: Banks’ entry is likely to intensify competition for private credit funds