Tianjin Plastics FIN 570 Irvine1

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 Tianjin Plastics  A case study in international project finance.

人民币 Brian Hider  Brian Kopan Ernest Lew

October 8, 2008

Juan Villa

Cal State Fullerton, MBA Program

 

Background 

Case set in 1996



Chinese economy is growing rapidly



Foreign capital needed for infrastructure in China



Opportunity to fund power plant project in Tianjin province

 

 TEDA 

Established in 1984



Planned area of 33 sq. km.



Divided in 3 sub-areas



Land usage restrictions by government of China





Original Land Development Financing: 100% Chinese government Goal: become a modern industrial area which is the biggest in Asia and the best in China

 

 TEDA 

In 1992, TEDA FDI increased-needed for development



New Land Development Financing: combination of China’s government & MNCs.



Wholly foreign-owned companies and joint ventures were created to develop of land



MNC’s investment in the area has lead to strong economic growth in the TEDA region.

 

Project Structure: The Players 

Maple Energy (49% Equity)  US Based company, since 1989  Subsidiary of Northern States Utility 

Power plant projects in four countries Specialize in turnkey projects Tianjin Plastics (46% Equity)  Government run factory  Specialty is energy intensive extrusion process MOPI (5% Equity)  Chinese Ministry of Power Industry Wintel  Had Rmb that could not be repatriated 







 

Project Structure: Fundamentals 

Project life-4 year construction, 20 year operation



Operating costs fixed, paid in Rmb



20yr contract for free coal feedstock



Selling price of energy guaranteed (Rmb)



Profits virtually guaranteed as long as debt, equity and final profit are in Rmb

 

Project financed with 85% debt Forecast shows China requiring 21GW of additional power annually for a decade (150 plants of this size)

 

Project Finance 

Definition: the raising of capital to finance an investment project where the capital providers look at the cash flows from the project as the source to: (1) Service their loans (2) Provide the return of equity (3) Provide a return on their investment

 

Project Finance: Characteristics 

Separate legal entity 

Separate from investors and MNC



Singular focus of business



Predictable cash flows from operations 

Essential to securing project financing from outside partners



Finite project life 

Cash flows go toward servings its capital structure (debt & equity)

 

Exchange Rate Outlook  

Chinese Rmb is expected to weaken relative to the US$  International Fisher Effect (IFE)  



Higher expected inflation in China In 2000, Bank of China starts to loosen their hold on currency

Interest Rate Parity Theory (IRP) 



Higher interest rates in China vs. US (13% vs. 8%) on near and long term loans. Forecast 5% depreciation

 

Basic Issues Important Urgent

+Exchange Rate risk +Lack of free markets/gov’t controlled

+Two days to make recommendation

+Government restrictions on capital outflows

 

Immediate Issues Important Urgent

+Chinese gov’t can refuse to fulfill contract

+no hedging available

+Registered capital (equity investment) can’t leave country  country 

 

Cause/Effect Partially convertible Rmb

Lack of hedging options and forecast data

Unpredictability of project profitability

Political instability

Equity repatriation constraints

Lack of EX/IM financing help

 

Decision Criteria 

Quantitative: 





Highest likely NPV 

Sensitivity to currency exposure



Must have positive NPV

Shortest payback period

Qualitative 

Overall company growth strategy in TEDA

 

NPV and Payback Period Model 1996 +Operating Margin -Interest Expense -Taxes =Net Income +75% of Depr  -Principal -Princ ipal Pmt =Project Cash Flow

Construction

2020 3% Projected Growth

17% ROI Project Restriction Maple (49%) CF in Rmb Maple/W intel Rmb Loan Net CF CF Bal Available to Repatriate Repatriate XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX

+ Repatriated $'s + Maple/Wintel $ Loan Net CF = Maple $ Cash Flow

NPV @ 18% Disc

 

Option 1 Maple Energy invests directly with US$  Maple leaves US$ in project and can’t pull them out = lose equity investment.  Debt obligations are in US$ and will be exposed to exchange rate risk.  Currency Exposures: 

Firm Profitability 

Dollar based debt (almost 90% of debt)



Profit Magnitude  Profits converted to dollars Const. Loan + Syndicate Syndicate Loans NPV Renminbi Depreciation Rate Probability 1996 NPV Weighted NPV Payback Period Weighted Payback Period

-10% 20 % 3.3

-5% 70 % 7.4

0% 5% 13.5

5% 5% 23.1

0.7 5 1

5.2 5 4

0.7 5 0

1.2 5 0

7.7 5

 

Option 2 Back-to-Back loans  Maple Energy does US$/Rmb loan with another US firm doing business in China, Wintel 

Currency Exposures: 

Firm Profitability 



Dollar based debt (almost 90% of debt)

Profit Magnitude 

Profits converted to dollars

Back to Back Loan NPV Renminbi Depreciation Rate Probability 1996 NPV Weighted NPV Payback Period Weighted Payback Period

-10% 20 % 4.1 0.8 4 1

-5% 70 % 7.5 5.2 4 3

0% 5% 12.8 0.6 4 0

5% 5% 21.2 1.1 4 0

7.8 4

 

Option 2 (continued) Back-to-Back loans  Mechanics: 

  

 

Wintel has generated profits in Rmb (can’t repatriate earnings) Wintel loans Rmb70.018 to Maple for 6 years Maple loans $8.415 to Wintel for 6 years Maple: instead of converting their US$ and making the equity investment IN China, Maple BORROWS the Rmb from Wintel for the equity investment Maple pays loan with Rmb from cash flows Wintel pays loan with US$

 

Option 3 Have power price paid by Tianjin Plastics indexed to dollar  Tianjin has already contracted to purchase p urchase most of the power from the plant.  This guarantees earnings would maintain their US$ value. negative ive  Not allowed by MOPI due to concerns over negat impact it might have on their Rmb invested in project.  Currency Exposures: 

Profit Magnitude 

Profits converted to dollars

 

Option 4 Finance majority of project in Rmb (borrow locally)  Maple would borrow local Rmb.  No US$ exposure since Rmb (not US$) are invested in the project.  Large exchange rate risk on profit since all profits are in Rmb and must be converted to US$.  Currency Exposures:  Profit Magnitude 

Profits converted to dollars

$101.5 M Deposit NPV NPV Renminbi Depr eciation Rate Pr obability 1996 NPV Weighted NPV Payback Period Weighted Payback Period

-10% 20% (12.8) (2.6) 11 2

-5% 7 0% (11.5) (8.0) 11 8

0% 5% (9.0) (0.4) 12 1

5% 5% (4.0) (0.2) 12 1

(11.2) 11

 

Selected Option Option 2: Back-to-Back loans

Maple Energy

Loan of Rmb 70.018m 

(China)

(China)

Maple Energy (USA)

Wintel-China

Loan of US $8.415m 

Wintel

(USA)

 

Selected Option 1996 NPV & Payback Period P eriod Re nminbi De pre c ia tion Ra te Const. Loan then Syndicate Loans Loa ns NPV Payback Period

Back to Back Loan L oan NPV Payback Period

$101.5 M Deposit NPV NPV Payback Period

Proba bility Const. Loan then Syndicate Loans Loa ns NPV Payback Period

Back to Back Loan L oan NPV Payback Period

$101.5 M Deposit NPV NPV Payback Period

-10 % 3.3

-5 % 7.4

0% 13.5

5% 23.1

5

5

5

5

4.1

7.5

12.8

21.2

4

4

4

4

(12.8)

(11.5)

(9.0)

(4.0)

11

11

12

12

Expected NPV

20% 0.7

70% 5.2

5% 0.7

5% 1.2

1

4

0

0

5

0.8

5.2

0.6

1.1

7.8

1

3

0

0

4

(2.6)

(8.0)

(0.4)

(0.2)

(11.2)

2

8

1

1

11

7.7

 

 

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