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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. Background. Case set in 1996 Chinese economy is growing rapidly Foreign capital needed for infrastructure in China - PowerPoint PPT Presentation
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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 Program
人民币
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
+Exchange Rate risk+Lack of free markets/gov’t controlled
+Government restrictions on capital outflows
+Two days to make recommendation
Important
Urgent
Immediate Issues
+Chinese gov’t can refuse to fulfill contract
+no hedging available
+Registered capital (equity investment) can’t leave country
Important
Urgent
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
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 2020
+Operating Margin-Interest Expense-Taxes=Net Income+75% of Depr-Principal Pmt=Project Cash Flow
17% ROI Project Restriction
Maple (49%) CF in Rmb
Maple/Wintel Rmb Loan Net CF
Bal Available to Repatriate
+ Repatriated $'s
+ Maple/Wintel $ Loan Net CF
= Maple $ Cash Flow
NPV @ 18% Disc
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
3% Projected GrowthConstruction Phase
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 Loans NPVRenminbi Depreciation Rate -10% -5% 0% 5%Probability 20% 70% 5% 5%1996 NPV 3.3 7.4 13.5 23.1Weighted NPV 0.7 5.2 0.7 1.2 7.7Payback Period 5 5 5 5Weighted Payback Period 1 4 0 0 5
Option 2Back-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 NPVRenminbi Depreciation Rate -10% -5% 0% 5%Probability 20% 70% 5% 5%1996 NPV 4.1 7.5 12.8 21.2Weighted NPV 0.8 5.2 0.6 1.1 7.8Payback Period 4 4 4 4Weighted Payback Period 1 3 0 0 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 3Have 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
Option 4Finance 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 NPVRenminbi Depreciation Rate -10% -5% 0% 5%Probability 20% 70% 5% 5%1996 NPV (12.8) (11.5) (9.0) (4.0)Weighted NPV (2.6) (8.0) (0.4) (0.2) (11.2)Payback Period 11 11 12 12Weighted Payback Period 2 8 1 1 11
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
Selected Option1996 NPV & Payback PeriodRenminbi Depreciation Rate -10% -5% 0% 5%Const. Loan then Syndicate Loans NPV 3.3 7.4 13.5 23.1 Payback Period 5 5 5 5
Back to Back Loan NPV 4.1 7.5 12.8 21.2 Payback Period 4 4 4 4
$101.5 M Deposit NPV (12.8) (11.5) (9.0) (4.0) Payback Period 11 11 12 12
Probability 20% 70% 5% 5%Expected
NPVConst. Loan then Syndicate Loans NPV 0.7 5.2 0.7 1.2 7.7 Payback Period 1 4 0 0 5
Back to Back Loan NPV 0.8 5.2 0.6 1.1 7.8 Payback Period 1 3 0 0 4
$101.5 M Deposit NPV (2.6) (8.0) (0.4) (0.2) (11.2) Payback Period 2 8 1 1 11
Questions?
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