1. Tianjin Plastics A case study in international project finance.
Brian Hider
Brian Kopan
Ernest Lew
Juan Villa
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
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

13. Decision Criteria Quantitative: Qualitative 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 Rmb 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 Loan of Rmb 70.018m
Maple Energy
(China)
Wintel-China
(China)
Loan of US $8.415m
Wintel
(USA)
Maple Energy
(USA)

21. Selected Option

22. Questions?