Maple Leafs timely injection

In order to strengthen creditors confidence, the sponsors of Maple Leaf Cement, Kohinoor Textile Mills, have agreed to inject fresh funds of Rs1 billion into the company to improve the firms equity base and cash flows.
In this regard, company is planning to issue 153.84 million shares at Rs 6.5 per share, 35 percent discount to par. Shares issuance will increase KTMLs holding in MLCF from 50.13 percent to 64-65 percent, if MLCFs rights issue is left unsubscribed.
The helping hand came to support the successful completion of the restructuring of long-term Sukuk and syndicated loan worth Rs9.5 billion. "As lenders have shown confidence in our company, we are injecting funds to support their stance", one company official said.
The cement maker was able to bargain successfully with creditors; it managed to increase loan repayment tenure to average 9 years from 4 years, while also reducing the mark-up rate on loans. In the past few years, the companys liabilities have increased as it borrowed a significant amount of funds to increase cement production capacity by 6700 ton per day.
Though the expansion project enhanced Maples total production capacity to nearly 12,000 tons per day after the plant commenced commercial operation in Nov 2007, but poor domestic demand along with high freight charges and financial costs have destabilized its financial health. Consequently, the company incurred net losses of Rs982 million and Rs676 million in FY09 and FY08, respectively.
Surplus cement capacities in northern areas of the country, weak infrastructural spending, poor economic activity and law and order situation have kept cement prices under pressure.
On top of that, the companys presence in the north of the country has also reduced the export benefits as it has to bear additional cost of $16-17 per ton in order to transport its product to sea ports in the south amid lower FOB prices of around $52 per ton.
Going forward, the companys financial health and future payback capacity is highly dependent on domestic demand, since improvement in capacity utilization would help the firm ameliorate profit margins which otherwise would be under pressure due to high fixed cost.
However, restructuring will help the company improve its profitability during the next two years. The governments decision to offer a freight subsidy of 35 percent bodes well for the company as it would help Maple save nearly $5 per ton in transportation cost on exports.