Ship breaking company in operation from 70s requested advisory to improve long term financial position and improve credit rating from Credit rating agency.
Vora Corporate Finance streamlined the working capital cycle and asset base for the company to improve the capital structure and improved the credit rating by two notches.
The Full Story
M, N and O* was a group of three companies involved in shipbreaking activities. The operations of these companies were largely dependent upon working capital as large letter of credits have to be opened for buying ships. The total working capital limit of the group was Rs.1.1 billion.
Due to high working capital intensity of operations and deteriorating industry scenario, the credit rating agency downgraded rating of the 3 companies in FY17. Rating downgrade could affect the group on obtaining funds at desired rate of interest.
MNO’s management approached Vora Corporate Finance to help with the following financial parameters due to which the rating was downgraded:
- Debt Equity Ratio was over 10
- High Debtors and high debt compared to peers resulting in high working capital requirement.
- Liquidation of Letter of Credits was slow due to historical poor practises.
Vorafin focused on the following key areas of the group to improve the weak financial situation:
- Receivables Management: Review the credit terms provided to customers and improve receivables management
- Group wealth: Review the net worth of the group to see if it is adequate to meet liabilities
- Competition analysis: Review competitors’ policy of debtors’ management
- Ratio Analysis: To identify potential areas of financials to improve strength of balance sheet.
- New capital infused into the business to clear outstanding Letter of Credit balance and to improve financial position. Also certain unused family resources were identified and mobilised for business.
- This improved the Debt Equity ratio to bring it closer to a much acceptable ratio for the banks.
- Vorafin also suggested streamlining intercompany transactions for better receivables management and thereby improving working capital cycle. This resulted in releasing liquidity of business and reduced the working capital requirement of the company.
MNO’s financials improved and the credit rating agency increased the credit rating by two notches for limits of Rs. 1.1 Billion (Rs. 110 Crore).
M, N, and O’s capital structure improved substantially because of this exercise and balance sheet strength was improved.
Company’s standing with the Bankers was improved and rate of interest was made more favourable.
Company was now in a better position to raise further funds in future in case of more favourable business opportunities.
* We take our clients’ confidentiality seriously. While the names are changed, the results are real.