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Case 2 Tianjin

This document discusses financing options for a plastics plant project in Tianjin, China. It outlines the project details, risks, and three financing scenarios considered: dollar indexed rate adjustment, back-to-back loan, and RMB loan. Analysis shows the back-to-back loan has the highest NPV, shortest payback period, and reduces exchange rate risk the most by fixing the RMB/dollar rate for six years. While DBFMO project financing and this case share some similarities, such as construction/completion risks and small equity portions, they differ in that DBFMO includes management fees and realization fees while avoiding dividend payments, and have varying political and exchange rate risks depending on location.

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Sophia Sier
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72 views11 pages

Case 2 Tianjin

This document discusses financing options for a plastics plant project in Tianjin, China. It outlines the project details, risks, and three financing scenarios considered: dollar indexed rate adjustment, back-to-back loan, and RMB loan. Analysis shows the back-to-back loan has the highest NPV, shortest payback period, and reduces exchange rate risk the most by fixing the RMB/dollar rate for six years. While DBFMO project financing and this case share some similarities, such as construction/completion risks and small equity portions, they differ in that DBFMO includes management fees and realization fees while avoiding dividend payments, and have varying political and exchange rate risks depending on location.

Uploaded by

Sophia Sier
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Case 2:Tianjin

Plastics China
Outline
Project Overview
Risks
Scenarios
Financing Decision
DBFMO-Project Financ
Project Overview

Two phases

Construction phase (1996-2000)
Needs financing of $93.5 million dollars ( 786.8 RMB)
Total equity: $16,5 million
Total debt: $77 million
Post completion phase (2000 -2020)
Total equity: $16,5 million Ke 18%
Total debt: $100,9 milion Kd 7.83%
Total capital: $ 117,4 million
Project WACC: 9.26%




Risks

Construction risk
Project may not be completed on time
Project may not be completed within budgeted costs
Quality of power plant below required standard
Operating risk
Operating risk is low because of expertise with these kind of projects
No experience in China
Credit risk
Cash flows are not known, so possibility that project may default
Fixed interest rates for main part of loans, but not for all
Political risk
Chinese government limited targeted ROI
Refused fulfillment for contracts like this
Chinese government did not allow equity capital to be repatriated


Scenarios

Dollar Indexed Rate Adjustment
Simplest Method
Price paid by Tianjin indexed by dollar instead of RMB
Ruled out by MOPI


Back-to-Back loan








Scenarios

Rmb Loan
Financing project by borrowing from a Chinese bank with
interest rate of 13%
100% dollar denominated collateral (4% Deposit rate)
In millions of Rmb Cost of Equity & Debt
Equity 137.24 14%
Total Debt in Rmb 844.48 13%
Total Capital 981.72
Financing Decision
Taken into account:
Currency risk (Not freely convertible)
Inflationary Pressures
Depreciation of Rmb against dollar, the more possible scenario


In million $ Dollar Indexed Rate
Adjustment
Back-to-back Loan RMB loan
Current
Rate
5% Depr. 10%
Depr.
Current
Rate

5%
Depr.

10%
Depr.

Current
Rate

5%
Depr.

10% Depr.

NPV
(1996-2020)
15.14 13.54 11.98 14.56 Rmb/$ exch.
rate fixed for
6 years
4.30 2.97 1.84
Payback
Period
(years)
6<PP<6.5 6<PP<6.5

7 5.5<PP<6 5.5 5.5 5.5<PP<6

Financing Decision
Dollar
Indexed Rate
Adjustment
Back-to-back
Loan
Rmb Loan
WACC 9.26% 12.39% 13.14%
IRR 14.70% 14.70% 12.39%
Best Option for Mapple

Back-to-back loan
It offers:
Decrease of exchange rate risk (Rate at 8.32Rmb/$)
High NPV
Short payback period
Aversion of binding dollars in the long-term

DBFMO-Project Finance

Similarities
Financing model during construction and operational phase, with loans and equity
Debt management, with floating loans, swaps and fixed rates from banks
A public part is involved
Equity finance constitutes only a small part of total capital investment
Similar construction and completion risks


Differences
In DBFMO there are management services and realization fees
No dividend payment in Project finance
Different risks, due to the differences between the target-countries
(e.g. exchange risk, political risk, environmental risk)
Questions?

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