Bain Capital’s proposed stake buyout in Manappuram Finance will have positive effect on NBFC’s governance: S&P, Fitch

Global rating agencies S&P Global Ratings and Fitch Ratings are upbeat about the positive effect that Bain Capital’s proposed acquisition of a stake in Manappuram Finance Ltd (MFL) will have on the non-bank lender’s corporate governance and management.

S&P observed that MFL‘s corporate governance will get a boost from Bain Capital’s recent strategic investment. The US-based private investment firm could materially influence the India-based gold financier’s strategy and appoint key personnel, including the CEO.

Fitch Ratings said Bain Capital’s plans to acquire a stake in Manappuram Finance could help allay management succession uncertainty and strengthen governance at the lender.

Bain Capital will buy a majority controlling stake in Kerala-based Manappuram Finance Ltd, which is India’s second 2nd largest financier in the gold loan segment, through a combination of preferential allotment of equity and warrants and open offer.

Growth capital

As part of the transaction, Bain Capital will be investing ₹4,385 crore to acquire an 18 per cent stake on a fully-diluted basis via preferential allotment of equity & warrants at a price of ₹236 per share which is at a premium of 30 per cent over the 6-month average trading price.

The transaction will trigger a mandatory open offer for the purchase of an additional 26 per cent stake in the company on an expanded capital basis (excluding warrants). The open offer price has been fixed at ₹236 per share. Based on the open offer subscription, Bain Capital’s stake post the investment will vary between 18 per cent and 41.7 per cent on a fully-diluted basis (including shares to be issued pursuant to exercise of warrants).

Existing promoters will hold a 28.9 per cent stake in the company post the investment on a fully-diluted basis (including shares to be issued pursuant to exercise of warrants) from 35 per cent as at December-end 2024.

In S&P’s words

S&P emphasised that the transaction will provide Manappuram with growth capital to focus on its core product of gold-backed loans and on other secured loans.

“We continue to assess the company’s capital and earnings as very strong, with the risk-adjusted capital ratio likely to exceed the March 31, 2024, level of 30 per cent after the transaction.

“The partnership with Bain Capital will also enable Manappuram to invest in new-age technologies such as machine learning and AI. This will drive innovation and enhance the company’s competitiveness and underwriting standards, particularly for its secured loan product offerings,” said S&P.

Given the ongoing stress in India’s microfinance sector and heightened regulatory scrutiny, S&P believes the share of microfinance loans in Manappuram‘s assets under management (AUM) could gradually reduce. It also sees a possibility that Manappuram could monetise its subsidiary Asirvad Micro Finance in the medium term and focus on secured lending, subject to market conditions.

Fitch’s assessment

Fitch Ratings noted that the new equity raised should support Manappuram’s capital buffer and growth prospects, but an intended refresh of the company’s executive team could raise continuity risks if not smoothly managed. Any impact on the credit profile may take time to materialise.

The rating agency said the purchase will provide Bain with joint control and the right to nominate two board directors and key management personnel – the latter in conjunction with the founder and existing major shareholder, V.P. Nandakumar.

Fitch observed that Nandakumar will remain in a non-executive position, providing leadership continuity, while Bain’s role in board and management selection could broaden the executive talent pool and gradually strengthen governance and compliance, if executed well.

The agency expects that Bain’s involvement will assist in transitioning Manappuram from its greater reliance on its founder’s strategy and leadership towards a more institutionalised management structure. This could form an important step in resolving key-person risks, which Fitch has identified as a constraint for Manappuram’s profile.