Transcript 币 人民 Tianjin Plastics A case study in international project finance.

Tianjin Plastics
A case study in international project finance.
人民币
Brian Hider
Brian Kopan
Ernest Lew
October 8, 2008
Juan Villa
Cal State Fullerton, MBA Program
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
Important
Urgent
+Exchange Rate risk
+Lack of free
markets/gov’t
controlled
+Two days to make
recommendation
+Government
restrictions on capital
outflows
Immediate Issues
Important
Urgent
+Chinese gov’t can
refuse to fulfill
contract
+no hedging available
+Registered capital
(equity investment)
can’t leave country
Cause/Effect
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
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
+Operating Margin
-Interest Expense
-Taxes
=Net Income
+75% of Depr
-Principal Pmt
=Project Cash Flow
Construction
Phase
2020
3% Projected Growth
17% ROI Project Restriction
Maple (49%) CF in Rmb
Maple/Wintel Rmb Loan Net CF
Bal Available to Repatriate
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
+ Repatriated $'s
+ Maple/Wintel $ Loan Net CF
= Maple $ Cash Flow
NPV @ 18% Disc
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 NPV
Renminbi Depreciation Rate
Probability
1996 NPV
Weighted NPV
Payback Period
Weighted Payback Period
-10%
20%
3.3
0.7
5
1
-5%
70%
7.4
5.2
5
4
0%
5%
13.5
0.7
5
0
5%
5%
23.1
1.2
5
0
7.7
5
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
Back to Back Loan NPV
Renminbi Depreciation Rate
Probability
1996 NPV
Weighted NPV
Payback Period
Weighted Payback Period
-10%
20%
4.1
0.8
4
1
-5%
70%
7.5
5.2
4
3
0%
5%
12.8
0.6
4
0
5%
5%
21.2
1.1
4
0
7.8
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 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
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
$101.5 M Deposit NPV
Renminbi Depreciation Rate
Probability
1996 NPV
Weighted NPV
Payback Period
Weighted Payback Period
-10%
20%
(12.8)
(2.6)
11
2
-5%
70%
(11.5)
(8.0)
11
8
0%
5%
(9.0)
(0.4)
12
1
5%
5%
(4.0)
(0.2)
12
1
(11.2)
11
Selected Option
Option 2: Back-to-Back loans
Maple Energy
Loan of Rmb 70.018m
(China)
Maple Energy
(USA)
Wintel-China
(China)
Loan of US $8.415m
Wintel
(USA)
Selected Option
1996 NPV & Payback Period
Renminbi Depreciation Rate
Const. Loan then Syndicate Loans NPV
Payback Period
Back to Back Loan NPV
Payback Period
$101.5 M Deposit NPV
Payback Period
Probability
Const. Loan then Syndicate Loans NPV
Payback Period
Back to Back Loan NPV
Payback Period
$101.5 M Deposit NPV
Payback Period
-10%
3.3
-5%
7.4
0%
13.5
5%
23.1
5
5
5
5
4.1
7.5
12.8
21.2
4
4
4
4
(12.8)
(11.5)
(9.0)
(4.0)
11
11
12
12
Expected
NPV
20%
0.7
70%
5.2
5%
0.7
5%
1.2
1
4
0
0
5
0.8
5.2
0.6
1.1
7.8
1
3
0
0
4
(2.6)
(8.0)
(0.4)
(0.2)
(11.2)
2
8
1
1
11
7.7
Questions?