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

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Tianjin Plastics

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Tianjin plastics

Tianjin Plastics

Group Gamma

Samir Bhargava

Jung-Chang Cho

Jennifer Cota

Kurt Ellison

Kelly Hickman

Jiby Mathews


Joint venture

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

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

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

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

Issue Defined

  • Choose the best financing option

  • Repatriation

  • Currency Risk


Basic matrix

Basic Matrix


Immediate matrix

Immediate Matrix


Fishbone analysis

Fishbone Analysis


Financing arrangements

Financing Arrangements


Constraints opportunities

Constraints & Opportunities

  • Opportunities

    -Enormous market potential

    -Local economic prosperity

  • Constraints

    - Inadequate capital resources

    - Investment barriers


Available solutions

Available Solutions

  • Indirect RMB Swap

  • Dollar-Indexed Rate Adjustment

  • Borrow in Local Currency

  • Back-to-Back Loan


Decision criteria

Decision Criteria

  • Feasibility

  • Risk Assessment

  • Cost

  • Cash Flow / NPV

  • Internal Rate of Return


Indirect rmb swap

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

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

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 currency1

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

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 loan1

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 loan2

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 loan3

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

Cash Flows for Original Financing Arrangement


Borrow in local currency vs back to back loan

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

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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