Tianjin Plastics Group Gamma Samir Bhargava Jung-Chang Cho Jennifer Cota Kurt Ellison Kelly Hickman...
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Transcript of Tianjin Plastics Group Gamma Samir Bhargava Jung-Chang Cho Jennifer Cota Kurt Ellison Kelly Hickman...
Tianjin PlasticsGroup Gamma
Samir Bhargava
Jung-Chang Cho
Jennifer Cota
Kurt Ellison
Kelly Hickman
Jiby Mathews
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
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
Build-Operate-Transfer (BOT) Agreement
Maple-Tianjin-MOPI Joint Venture – own & manage for 20 years
Turn over to Hebei Province in 2020
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
Issue Defined
Choose the best financing option
Repatriation
Currency Risk
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
Immediate Matrix
Important/Urgent
Low High
Low Inadequate Capital
Resources in ChinaLimits on ROI
High Cash Flow RiskEnsure Repatriation of Original
Equity Investment
Fishbone Analysis
High Investment Risk in China
Repatriation
GovernmentRestrictions
and Guidelines
Chinese Currency Valuation &
Exchange Rate Risk
Economic & Political risk
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
Constraints & OpportunitiesOpportunities
-Enormous market potential-Local economic prosperity
Constraints- Inadequate capital resources- Investment barriers
Available Solutions
Indirect RMB Swap
Dollar-Indexed Rate Adjustment
Borrow in Local Currency
Back-to-Back Loan
Decision Criteria
Feasibility
Risk Assessment
Cost
Cash Flow / NPV
Internal Rate of Return
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
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
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)
Borrow in Local Currency
Income?-4% interest in collateral deposit
Repatriation?-Deposit returned in last 6 years amortization
schedule-Profits exposed to currency risk
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
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%
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
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
Back-to-Back Loan
Repatriation?-Interest earned on initial capital-Initial capital returned in 6 years-Profits not exposed to currency risk
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
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$
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%
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