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Tianjin Plastics

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

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Tianjin Plastics

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  1. Tianjin Plastics Group Gamma Samir Bhargava Jung-Chang Cho Jennifer Cota Kurt Ellison Kelly Hickman Jiby Mathews

  2. 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 Joint Venture

  3. 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

  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

  8. Immediate Matrix

  9. Fishbone Analysis

  10. Financing Arrangements

  11. 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 -> 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. 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%

  19. 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

  20. Back-to-Back Loan • Cost? -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

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

  22. Cash Flows for Original Financing Arrangement

  23. 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%

  24. 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

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