Tianjin%20Plastics

1
Tianjin Plastics

• Group Gamma
• Samir Bhargava
• Jung-Chang Cho
• Jennifer Cota
• Kurt Ellison
• Kelly Hickman
• Jiby Mathews

2
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

3
The Proposed Power Plant

• 140 megawatt coal-fired steam-electric plant
• Provide all of Tianjins 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

4
Build-Operate-Transfer (BOT) Agreement

• Maple-Tianjin-MOPI Joint Venture
• own manage for 20 years
• Turn over to Hebei Province in 2020

5
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

6
Issue Defined

• Choose the best financing option
• Repatriation
• Currency Risk

7
Basic Matrix
Important/ Urgent Low High
Low Export-Import Bank Announcing its Non-Participation in Funding Large Projects in China Contract Fulfillment Not Guaranteed by Chinese Government
High Currency Controls Exchange Rate Risk
8
Immediate Matrix
Important/Urgent Low High
Low Inadequate Capital Resources in China Limits on ROI
High Cash Flow Risk Ensure Repatriation of Original Equity Investment
9
Fishbone Analysis
10
Financing Arrangements
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Constraints Opportunities

• Opportunities
• -Enormous market potential
• -Local economic prosperity
• Constraints
• - Inadequate capital resources
• - Investment barriers

12
Available Solutions

• Indirect RMB Swap
• Dollar-Indexed Rate Adjustment
• Borrow in Local Currency
• Back-to-Back Loan

13
Decision Criteria

• Feasibility
• Risk Assessment
• Cost
• Cash Flow / NPV
• Internal Rate of Return

14
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

15
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 -gt MOPI ruled out immediately
• -Revenue structure Rmb based
• -Negative impact on returns of invested capital

16
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)

17
Borrow in Local Currency

• Income?
• -4 interest in collateral deposit
• Repatriation?
• -Deposit returned in last 6 years amortization
  schedule
• -Profits exposed to currency risk

18
(No Transcript)
19
Local Currency Loan Local Currency Loan Local Currency Loan Local Currency Loan Local Currency Loan
Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation)
RMB Appreciate RMB Appreciate RMB Depreciate RMB Depreciate
Date Exch. Rate(RMB/) Real CashInflow Exch. Rate(RMB/) Real Cash Inflow
2000 7.51 2,567,474.07 10.99 3,757,195.74
2001 7.30 893,483.46 11.68 1,429,573.53
2002 7.11 939,592.05 12.28 1,622,811.59
2003 6.91 987,636.62 12.92 1,846,637.51
2004 6.71 1,039,053.31 13.53 2,095,140.29
2005 6.51 1,094,057.46 14.06 2,362,895.22
2006 6.31 22,842.97 14.45 52,310.77
Total 7,544,139.95 13,166,564.65
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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
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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

22
Back-to-Back Loan

• Cost?
• -Initial capital loaned to Wintel
• -Immediately converted to current currency
  exchange rate (Rmb8.32/)
• -Wintel will charge 10.5 for six year loan
• Income?
• -Maple earns LIBOR 1.45 return on six year
  loan

23
Back-to-Back Loan

• Repatriation?
• -Interest earned on initial capital
• -Initial capital returned in 6 years
• -Profits not exposed to currency risk

24
Back-to-Back Loan Back-to-Back Loan Back-to-Back Loan Back-to-Back Loan Back-to-Back Loan
Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation) Real Cash Inflows (Repatriation)
RMB Appreciate RMB Appreciate RMB Depreciate RMB Depreciate
Date Exch. Rate(RMB/) Real CashInflow Exch. Rate(RMB/) Real Cash Inflow
1996 8.32 1,776,346.38 8.32 1,776,346.38
1997 8.32 1,776,346.38 8.32 1,776,346.38
1998 8.32 1,776,346.38 8.32 1,776,346.38
1999 8.32 1,776,346.38 8.32 1,776,346.38
2000 7.51 1,603,408.81 10.99 2,346,399.84
2001 7.30 1,558,573.14 11.68 2,493,717.03
Total 10,267,367.45 11,945,502.37
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Cash Flows for Original Financing Arrangement
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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

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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