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Tianjin Plastics. Group Gamma Samir Bhargava Jung-Chang Cho Jennifer Cota Kurt Ellison Kelly Hickman Jiby Mathews. Tianjin Plastics / Chinese Ministry of Power Industry Government owned enterprise Uses energy-intensive extrusion process for production of

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Tianjin Plastics

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Tianjin Plastics

Group Gamma

Samir Bhargava

Jung-Chang Cho

Jennifer Cota

Kurt Ellison

Kelly Hickman

Jiby Mathews


Tianjin Plastics / Chinese Ministry of Power Industry

Government owned enterprise

Uses energy-intensive extrusion process for production of

raw industrial plastic products

Maple Energy

U.S. – based international power plant developer

Established in 1989

Successful power plant projects in Argentina, Costa Rica, the Dominican Republic, and the United Kingdom

Joint Venture


The Proposed Power Plant

  • 140 megawatt coal-fired steam-electric plant

  • Provide all of Tianjin’s power needs

  • Excess power to be sold on regional electrical power grid

  • Construction & testing requires 4 years

  • Power purchasing agreement with Chinese Ministry of Power Industry

    • Provision for free coal feedstock for life of power plant


Build-Operate-Transfer (BOT) Agreement

  • Maple-Tianjin-MOPI Joint Venture

    – own & manage for 20 years

  • Turn over to Hebei Province in 2020


What is Project Financing?

  • Typically used for large-scale, long-term projects

  • Lenders look to assets & cash flow of project

  • Preferred & primary method for financing infrastructures

  • Structured as a single-purpose corporation

  • Lenders have no recourse to non-project assets


Issue Defined

  • Choose the best financing option

  • Repatriation

  • Currency Risk


Basic Matrix


Immediate Matrix


Fishbone Analysis


Financing Arrangements


Constraints & Opportunities

  • Opportunities

    -Enormous market potential

    -Local economic prosperity

  • Constraints

    - Inadequate capital resources

    - Investment barriers


Available Solutions

  • Indirect RMB Swap

  • Dollar-Indexed Rate Adjustment

  • Borrow in Local Currency

  • Back-to-Back Loan


Decision Criteria

  • Feasibility

  • Risk Assessment

  • Cost

  • Cash Flow / NPV

  • Internal Rate of Return


Indirect RMB Swap

  • Feasibility?

    • Not feasible due to lack of financial derivates to hedge

    • Non-existence of financial markets in China

    • Chinese government controls the amount of

      Rmb converted to hard currency


Dollar-Indexed Rate Adjustment

  • Power price paid by Tianjin Plastics indexed to the dollar

    -Simplest solution

    -Dependable revenue stream

    -Minor role of costs of production

    -Earnings essentially guaranteed, preserving U.S. dollar value

  • Feasibility?

    • -NO -> MOPI ruled out immediately

    • -Revenue structure Rmb based

    • -Negative impact on returns of invested capital


Borrow in Local Currency

  • Feasible?

    -Yes

    -Cash inflows and outflows in same currency (RMB)

  • Risk?

    -Currency valuation risk

    -Maple is not insulated from currency exchange risk

  • Cost?

    -Bank of China will charge 13% interest for 10 year loan

    -Initial collateral in 100% dollar-denominated deposit (not required until fourth year)


Borrow in Local Currency

Income?

-4% interest in collateral deposit

Repatriation?

-Deposit returned in last 6 years amortization schedule

-Profits exposed to currency risk


Back-to-Back Loan

Loan of US $8.415m

Maple Energy

(USA)

Wintel

(USA)

LIBOR + 1.45%

Loan of Rmb70.018m

Maple Energy

(CHN)

Wintel - China

(CHN)

10.5%


Back-to-Back Loan

  • Feasible?

    -Yes

    -Cash inflows in U.S. Dollars

    -Cash outflows in local currency (RMB)

  • Risk?

    -Currency valuation risk borne by Wintel

    -Maple insulated from currency exchange risk

    -Limited interest rate risk due to variable loan rate


Back-to-Back Loan

  • Cost?

    -Initial capital loaned to Wintel

    -Immediately converted to current currency exchange rate (Rmb$8.32/$)

    -Wintel will charge 10.5% for six year loan

  • Income?

    -Maple earns LIBOR + 1.45% return on six year loan


Back-to-Back Loan

  • Repatriation?

    -Interest earned on initial capital

    -Initial capital returned in 6 years

    -Profits not exposed to currency risk


Cash Flows for Original Financing Arrangement


Borrow in Local Currency vs. Back-to-Back Loan

  • Cash Flow / NPV:

    • Borrow in Local Currency: $1,003,415

    • Back-to-Back Loan: $1,639,503

  • Internal Rate of Return:

    • Borrow in Local Currency: 15.2%

    • Back-to-Back Loan: 15.3%


Action Plan

  • Finance with Back-to-Back Loan

    • Feasible, includes Solving Repatriation Issue

    • No Currency Risk

    • Lower Cost than Borrowing in Local Currency

      -Netting Interest Expense & Interest Income

    • Lower Cost Leads to Higher NPV & IRR


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