Tianjin Plastics Case

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EXECUTIVE SUMMARY: Maple Engery (U.S), a U.S.-based power plant provider, is evaluating the prospects for a project financing of the Tianjin Plastics power plant project in China in 1996. The proposed project financing agreement must ensure the financial viability of the project. In addition, the proposal must consider both the currency risk of potential RMB devaluation and the impact of substantial barriers to investing in China, including • Chinese government limited the target ROI between 15%-17%, while analyst estimated at least 18% was needed to adequate compensation for projects of this type. • Chinese government may refuse to guarantee fulfillment of a contract like this. This increased the project risk, hence the cost of borrowing. • Chinese government did not allow equity investment to be repatriated. Maple Engery must find a solution to repatriate its invested capital. The case discussed in details of three options for repatriation of Maple’s equity investment, including back-to-back loans, dollar-indexed rate adjustment, and RMB swaps. We found back-to-back loan was the most attractive option, with a NPV of $11.6 million and a discounted payback period of 5 years. Maple can also lock a fixed exchange rate at 8.32 RMB/$ for six years. Project overview 1. Background Maple Energy, a wholly-owned subsidiary of Northern States Utilities, was established in 1989. Maple was a developer of power plan projects and successfully completed power plan projects in four countries. In 1996, Maple had concluded the power purchasing agreement (PPA) with the Chinese Ministry of Power Industry (MOPI), with a free coal feedstock for the life of the power plant (20+ years). Maple formed a joint venture with Tianjin Plastics and MOPI to operate the power plant for 20 years and would hand out the control of the power plant to local government.

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