National Polymer Industries Ltd will avail a long-term loan of Tk190 crore from its non-listed sister concern National Fittings and Accessories Ltd (NFAL).
The board of directors of the listed company made the decision last Wednesday. They intend to repay the entire loan in quarterly instalments within a five-year period.
In its public disclosure, National Polymer informed that the intercompany loan shall be used to off-set several existing high-cost loans from non-banking financial institutions (NBFI) and commercial banks.
It will reduce interest expenses of the listed company and free up working capital lines, the company informed.
The move will ensure smooth operations of National Polymer even during the adverse economic condition created by the Covid-19 pandemic, it added.
The company also said that no additional amount, except the actual loan interests and charges, will be paid to the NFAL for assisting with the credit facility.
National Polymer has disclosed that its Managing Director Riad Mahmud is also in the management of NFAL. He and his family members hold the majority of the non-listed company's shares.
Why the via arrangement?
"Both the companies have their creditworthiness and banks are well informed about the utilisation plan," Riad Mahmud replied when asked why they had opted for the via arrangement.
"The via arrangement is preferred because the non-listed company's long-term debt is virtually zero. Therefore, it is easier for the company to avail long term loans from banks."
He also said that the repayment would be done by the listed company, while the non-listed company would merely carry the loan's responsibility without having any financial benefits.
Also, there will not be any long-term expansion with this loan amount, Mahmud added.
National Polymer Company Secretary Md Abdul Maleque told The Business Standard that the arrangement will keep the listed company's external debts low by cutting annual interest expenses by an estimated amount of Tk8-10 crore.
"We have some high-cost loans, especially ones from NBFIs that charge 13-14 percent interests. The intercompany loan will cost us way less, bringing the interest rate down to single digit.
"Besides, after the credit facility, our working capital financing will be much smoother," he added.
Intercompany loans and other transactions in Bangladesh always demand a second look from analysts and regulators.
It is a common trend that sponsors and directors prefer winning arrangements for non-listed companies where they own almost all the shares and deprive the general shareholders of the listed companies.
Recently, the Bangladesh Securities and Exchange Commission (BSEC) has fined the directors of a listed cement company for violating rules while providing intercompany loans. The securities regulator also decided to appoint a special auditor to investigate a textile company's intercompany loan.
However, National Polymer is not providing loans, it is rather receiving credit from a stronger sister concern.
Md Abdul Muktadir, CFA charter holder and CEO of PLFS Investments said that equity analysts would check two things seriously.
Firstly, whether the listed company pays any extra fees or added interest on top of what the non-listed one actually has to pay to the banks.
Secondly, whether the listed company uses the borrowed amount to make any investment or to finance other activities. In the second case, analysts anticipate fund diversion or embezzlement.
"If neither of the two things takes place in National Polymer, the plan will benefit the general shareholders of the company," said the chartered financial analyst.
National Polymer, began its operations in 1987 and was listed with the stock exchange in 1993.
The company, with its paid-up capital of Tk36.5 crore, has achieved a turnover of Tk281.8 crore in the first nine months of the 2019-20 fiscal year. Its gross profit stood at Tk53.14 crore and net profit for the period was Tk13.41 crore.
In the previous fiscal year of 2018-19, National Polymer made a net profit after tax of Tk12.72 crore, up from Tk7.93 crore in the 2017-18 fiscal year.
As of March 31, 2019, National Polymer's total long-term loans were Tk62.9 crore, down from Tk68.24 crore a year ago. The current maturity of long-term loans went up to Tk28.2 crore from Tk26.14 crore a year ago. The short-term loans shot up to Tk194 crore, which was Tk157.27 crore at the end of March 2019.
The company's unaudited net asset value per share stood at Tk35.43 and its earnings per share was Tk3.67 for the first nine months of the 2019-20 fiscal year.
Sponsors and directors currently hold over 43 percent of the company's shares, institutions on 10.22 percent and the general public holds 46.67 percent shares.
National Polymer's shares are trading at Tk61 at the Dhaka Stock Exchange.