Jindal Vijaynagar to securitises its way through trouble
According to newspaper reports, Jindal Vijaynagar Steel Limited (JVSL) is contemplating a move to securitise Rs 2 bn worth of receivables from sale of hot rolled coils (HRCs). The deal has been structured by ICICI.
JVSL, an O P Jindal group company, owns and operates a 1.6 million tonnes per annum steel plant. The company has of late been facing cash flow related problems in view of its large debt servicing costs and the delayed recovery in the steel sector.
The company has entered into an agreement with an Australian company, which will be souring the HRCs from JVSL.
JVSL has been facing a cash crunch in view of the failure of its shareholder's to exercise a call option to buy equity in the company. Further to this, the Industrial Finance Corporation of India (IFCI) has also failed to sanction an agreed amount. The decision to securitise receivables will enable JVSL to source funding for its project, that are under various stages of completion. ICICI is to forward the funding at a discount to its long term funding rate.
The sharp recovery in the demand for steel and the relatively mild recovery in prices have dramatically improved the prospects of the company, which has faced a significant cost overrun due to a high debt burden (high interest costs). The improving prospects for the steel sector are however likely to benefit the company in sourcing its funding requirements and enabling a faster breakeven.
The key concern facing the company pertains to the possibility of a decline in prices of steel if domestic and international demand were to falter. This is mainly due to the fact that the company's costs of production are high and in a scenario of declining prices it would not be able to effectively compete with other large capacity - more efficient steel companies like Tisco.
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