tianjin plastics
DESCRIPTION
Tianjin Plastics. Group Gamma Samir Bhargava Jung-Chang Cho Jennifer Cota Kurt Ellison Kelly Hickman Jiby Mathews. Tianjin Plastics / Chinese Ministry of Power Industry Government owned enterprise Uses energy-intensive extrusion process for production of - PowerPoint PPT PresentationTRANSCRIPT
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Tianjin PlasticsGroup Gamma
Samir Bhargava
Jung-Chang Cho
Jennifer Cota
Kurt Ellison
Kelly Hickman
Jiby Mathews
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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
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The Proposed Power Plant
140 megawatt coal-fired steam-electric plant
Provide all of Tianjin’s 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
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Build-Operate-Transfer (BOT) Agreement
Maple-Tianjin-MOPI Joint Venture – own & manage for 20 years
Turn over to Hebei Province in 2020
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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
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Issue Defined
Choose the best financing option
Repatriation
Currency Risk
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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
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Immediate Matrix
Important/Urgent
Low High
Low Inadequate Capital
Resources in ChinaLimits on ROI
High Cash Flow RiskEnsure Repatriation of Original
Equity Investment
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Fishbone Analysis
High Investment Risk in China
Repatriation
GovernmentRestrictions
and Guidelines
Chinese Currency Valuation &
Exchange Rate Risk
Economic & Political risk
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Financing Arrangements
$117.4 million
Debt: $ 100.9 million(Bank of China and
Syndication loan)
Equity$16.5 million
Maple (49%)$8.085 million
MOPI (5%)$0.825 million
Tianjin Plastics (46%)$ 7.59 million
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Constraints & OpportunitiesOpportunities
-Enormous market potential-Local economic prosperity
Constraints- Inadequate capital resources- Investment barriers
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Available Solutions
Indirect RMB Swap
Dollar-Indexed Rate Adjustment
Borrow in Local Currency
Back-to-Back Loan
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Decision Criteria
Feasibility
Risk Assessment
Cost
Cash Flow / NPV
Internal Rate of Return
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Indirect RMB SwapFeasibility?
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
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Dollar-Indexed Rate Dollar-Indexed Rate AdjustmentAdjustment
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 -> MOPI ruled out immediately -Revenue structure Rmb based-Negative impact on returns of invested
capital
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Borrow in Local CurrencyFeasible?
-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)
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Borrow in Local Currency
Income?-4% interest in collateral deposit
Repatriation?-Deposit returned in last 6 years amortization
schedule-Profits exposed to currency risk
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Local Currency LoanReal Cash Inflows (Repatriation)RMB Appreciate RMB Depreciate
DateExch. Rate
(RMB/$)Real Cash
InflowExch. Rate
(RMB/$)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
Maple Energy(USA)
Maple Energy(CHN)
Wintel(USA)
Wintel - China(CHN)
Loan of US $8.415m
LIBOR + 1.45%
Loan of Rmb70.018m
10.5%
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Back-to-Back LoanFeasible?
-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
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Back-to-Back LoanCost?
-Initial capital loaned to Wintel-Immediately converted to current currency exchange
rate (Rmb$8.32/$)-Wintel will charge 10.5% for six year loan
Income?-Maple earns LIBOR + 1.45% return on six year loan
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Back-to-Back Loan
Repatriation?-Interest earned on initial capital-Initial capital returned in 6 years-Profits not exposed to currency risk
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Back-to-Back LoanReal Cash Inflows (Repatriation)
RMB Appreciate RMB Depreciate
DateExch. Rate
(RMB/$)Real Cash
Inflow
Exch. Rate
(RMB/$)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
0 Initial Investment (16,500,000)$ 13 7/1/08-6/30/09 26,941,466$ 1 7/1/96-6/30/97 (27,500,000)$ 14 7/1/09-6/30/10 27,840,772$ 2 7/1/97-6/30/98 (27,500,000)$ 15 7/1/10-6/30/11 17,011,575$ 3 7/1/98-6/30/99 (22,000,000)$ 16 7/1/11-6/30/12 17,641,628$ 4 7/1/99-6/30/00 (23,900,000)$ 17 7/1/12-6/30/13 18,301,834$ 5 7/1/00-6/30/01 23,364,327$ 18 7/1/13-6/30/14 18,850,889$ 6 7/1/01-6/30/02 25,073,523$ 19 7/1/14-6/30/15 19,416,416$ 7 7/1/02-6/30/03 26,900,522$ 20 7/1/15-6/30/16 19,998,909$ 8 7/1/03-6/30/04 28,855,912$ 21 7/1/16-6/30/17 20,598,876$ 9 7/1/04-6/30/05 30,951,417$ 22 7/1/17-6/30/18 21,216,842$
10 7/1/05-6/30/06 32,571,094$ 23 7/1/18-6/30/19 21,853,347$ 11 7/1/06-6/30/07 25,280,418$ 24 7/1/19-6/30/20 22,508,948$ 12 7/1/07-6/30/08 26,089,066$
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Borrow in Local Currency vs. Back-to-Back Loan
Cash Flow / NPV: Borrow in Local Currency: $1,003,415Back-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 PlanFinance 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