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Tianjin Plastics Brian Hider Brian Kopan Ernest Lew Juan Villa A case study in international project finance. October 8, 2008 Cal State Fullerton, MBA.

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Presentation on theme: "Tianjin Plastics Brian Hider Brian Kopan Ernest Lew Juan Villa A case study in international project finance. October 8, 2008 Cal State Fullerton, MBA."— Presentation transcript:

1 Tianjin Plastics Brian Hider Brian Kopan Ernest Lew Juan Villa A case study in international project finance. October 8, 2008 Cal State Fullerton, MBA Program

2 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

3 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

4 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.

5 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

6 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)

7 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

8 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)

9 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

10 Basic Issues +Exchange Rate risk +Lack of free markets/gov’t controlled +Government restrictions on capital outflows +Two days to make recommendation Important Urgent

11 Immediate Issues +Chinese gov’t can refuse to fulfill contract +no hedging available +Registered capital (equity investment) can’t leave country Important Urgent

12 Cause/Effect Unpredictability of project profitability Political instability Equity repatriation constraints Lack of hedging options and forecast data Partially convertible Rmb Lack of EX/IM financing help

13 Decision Criteria  Quantitative: Highest likely NPV  Sensitivity to currency exposure  Must have positive NPV Shortest payback period  Qualitative Overall company growth strategy in TEDA

14 NPV and Payback Period Model

15 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

16 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

17 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$

18 Option 3 Have power price paid by Tianjin Plastics indexed to dollar Tianjin has already contracted to purchase most of the power from the plant. This guarantees earnings would maintain their US$ value. Not allowed by MOPI due to concerns over negative impact it might have on their Rmb invested in project. Currency Exposures:  Profit Magnitude  Profits converted to dollars

19 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

20 Selected Option Option 2: Back-to-Back loans Maple Energy (China) Maple Energy (USA) Wintel (USA) Wintel-China (China) Loan of Rmb 70.018m Loan of US $8.415m

21 Selected Option

22 Questions?


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