Engineering Industry – Packing Credit & MTM limit management

• ‘Y Ltd.’ is an Engineering company with a turnover of over Rs.600 Cr engaged in export trade and is availing advisory services from IFA Global.
• It had hedged its foreign currency risk by availing PCFC financing.
• It had PC-INR limits present of INR 300 Crs and had availed financing of INR 50 Crs in the month of July’18 at USDINR levels of 68, which was due for repayment in November’18.
• During October’18, USDINR hovered near 74 levels. The Banks considered the depreciation in the rupee as an MTM loss for ‘Y Ltd.’ and further blocked their PCINR limits to the extent of depreciation in Rupee at around INR 20 Cr.

Challenge and Observation

• Liquidity Crunch: The company faced liquidity issues because of the restriction on drawing further funds. There was a risk that the company would have to halt its export production process, thereby affecting the overall profitability of the company.
• Other Sources: The client was forced to borrow funds at higher rates from sources other than PCFC thereby raising the interest cost to the client.

Observation: 

• IFA Global was confident in resolving the MTM issue, freeing up the blocked limits and reducing the finance cost incurred by ‘Y Ltd.’

Process

• IFA engaged in healthy negotiations with the bankers of ‘Y Ltd.’ and provided them with justifications of why the MTM imposition was incorrect and there was no direct exposure to the currency.
• Unrelenting pursuance substantiated with indisputable justifications eventually led to successful release of blocked limits by the bank.

OutCome

• Quick turnaround time for resolutions helped in early release of the blocked MTM limits.
• The business operations of ‘Y Ltd.’ were not hampered.
• The higher finance cost being incurred due to borrowings from other sources was saved since PCFC limits were reinstated.
• There was no cash outflow from ‘Y Ltd.’ in order to make good the MTM losses.