Company background: Gold Loan Finance Pvt. Ltd. was a non-banking financial company (NBFC) based in India that specialized in providing gold loans to individuals and small businesses. It was founded in 2005 by Mr. X, a former banker, with the aim of tapping into the huge demand for gold-backed loans in the country. The company had a network of over 100 branches across various states and had disbursed more than Rs. 500 crores in loans over the years. However, the company was facing a liquidity crunch due to the pandemic and the regulatory changes in the sector.

Challenges and opportunities: Gold Loan Finance Pvt. Ltd. faced several challenges in its efforts to raise funds for its business, such as:

• Limited access to bank credit lines and debt capital markets
• Higher cost of borrowing due to the perceived risk of the gold loan sector
• Limited collateral options apart from gold, which was subject to price fluctuations and regulatory restrictions
• Competition from other gold loan companies and banks that had stronger balance sheets and relationships with lenders

However, the company also had some unique advantages and opportunities, such as:

• Growing demand for gold-backed loans due to economic uncertainties and pandemic-related stress
• Ability to offer higher loan-to-value (LTV) ratios and faster processing times than banks and other lenders
• Experienced management team with a track record of profitability and risk management
• Potential for innovation in financial debt syndication that could attract new investors and lenders

Financial debt syndication: To address its funding challenges and leverage its opportunities, Gold Loan Finance Pvt. Ltd. adopted an innovative approach to financial debt syndication. It partnered with a leading investment bank to design a structured debt instrument that would appeal to a diverse set of investors and lenders. The key features of the instrument were:

• Multiple tranches: The debt instrument was divided into multiple tranches, each with a different risk and return profile. The senior tranche had the highest priority in terms of repayment and lower risk, and was meant for institutional investors such as mutual funds and insurance companies. The mezzanine tranche had a higher risk and return profile and was meant for high net worth individuals and family offices. The junior tranche had the highest risk and return profile and was meant for venture capitalists and private equity funds.
• Collateralized by gold loans: The debt instrument was collateralized by a pool of gold loans that Gold Loan Finance Pvt. Ltd. had disbursed to its customers. The loans had an average LTV ratio of 75%, which provided a cushion against price fluctuations and default risks. The collateral pool was managed by a third-party trustee who ensured compliance with the terms of the debt instrument.
• Credit enhancements: The debt instrument had several credit enhancements that reduced the risk for the investors and lenders. These included a cash reserve account that provided a buffer against defaults and a letter of credit that guaranteed the repayment of the senior tranche. The credit enhancements were provided by a consortium of banks and financial institutions that had confidence in the management and operations of Gold Loan Finance Pvt. Ltd.
• Flexible repayment schedule: The debt instrument had a flexible repayment schedule that allowed Gold Loan Finance Pvt. Ltd. to match its cash inflows with its debt obligations. The repayment schedule had a bullet repayment structure, where the principal and interest payments were due at the end of the tenor. This allowed the company to reinvest its cash flows in its core business and maintain its growth trajectory.

Results and impact: Thanks to these innovative measures, Gold Loan Finance Pvt. Ltd. was able to raise Rs. 100 crores in debt capital from a mix of institutional investors, family offices, and private equity funds. The debt instrument received an investment grade rating from a mix of institutional investors, family offices, and private equity funds. The debt instrument received an investment grade rating from a leading credit rating agency.