Tianjin Plastics (china)

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2.4 Political Risk

Political risk is the risk that the return of this investment can suffer because of political changes or instability in China and deterioration on the contract terms due to change on the political environment. Firstly, the Chinese government revised the target ROI to between 15% and 17% which was opposed by analysts who estimated it should be at 18%. Secondly the government refused most of the time to guarantee fulfillment of a contract as this one. Lastly, the Chinese government also did not give permission to repatriation of equity. So, although the joint venture is arranged with local/governmental institutions, this doesn’t mean that this risk will be mitigated in some way. On the other hand the lenders may accept to undertake some risk, but this could not be possible especially in an emerging economy, with ambiguous political environment at times. So the political risk is probably more possible to be borne at some extent by the equity holders.

Exchange rate risk

This risk relates to currency fluctuations which is when the currency of the revenue and the currency of debt diverge (i.e depreciation of Rmb) would cause a rise in the debt service expenses which are at above 80% financed in foreign exchange such as USD. It cannot be very clear to which party this risk should be addressed to bear. Key issue is the extent to which equity may be expected to bear exchange rate risk. While equity sponsors are expected to take more risk (and earn higher returns) than lenders, their preference is to bear risks they can control, such as construction or operational risks, rather than exchange risks that they cannot mitigate. Investors could best endeavor to bear the risk if there were sufficient hedging opportunities, which in fact is lacking in the Chinese currency market. So it seems that government has to bear this specific risk if it wishes to attract investors and also it can properly diversify it to taxpayers which are large in number.

3. Project Financing

The financing of this project consist of construction financing of 4 years and the post-completion financing. These phases will be explained shortly in the following paragraphs.

3.1 Construction Financing

The construction and testing takes 4 years and begins in 1996. In 2000 the operations of the power plant as well the interest and principal repayments will start. Total construction financing consist of a total capital of $117.4 million. This was provided through a combination of loans from the project sponsors: equipment vendors, Tianjin Plastics, Maple Energy and bank loans. The equity of $16.5 million is emerged from the joint venture, which can be split in Maple (49%), Tianjin Plastics (46%) and MOPI (5%). The debt consists of a bank loan in year 2 and 3 and a loan of the equipment vendors. Exhibit 1 gives an overview of the construction plan and exhibit 2

[pic 2]

Exhibit 1: Timeline for construction financing

INVESTMENTS

Equity (in millions)

Split (%)

Proportion in US Dollars ($)

Rmb Proportion in US Dollars ($)

Interest rate (%)

Tianjin Plastic

46

7,59

14%

Maple Energy

49

8,09

9%

MOPI

5

0,82

14%

Total Equity US dollars ($) proportion

49

8,09

Total Equity Rmb Proportion

51

8,42

Debt (in millions):

Bank loan year 2

36

27,50

9%

Bank loan year 3

36

27,50

9%

Equipment vendors (10%)

Equipment vendors (90%)

3

26

19,80

2,20

14%

Total Debt US proportion

97

74,80

Total Debt Rmb proportion

3

2,20

Total investment

93.5

Exhibit 2: Investments

3.2 Post-Completion Financing

This is the phase when the cash flow start to be collected and also the service debt payments are made. There is a total Enterprise Value of $117.4 million. The loan ($16.5 million) can be transferred to current equity, after the power plant construction and testing. The total debt is $100.9 million, this can be divided into a principal ($77 million) and accrued interest ($23.9 million). We calculated the WACC of this project and is at 9.3%, as shown in the exhibit below.

CAPITAL STRUCTURE (2000)

US $ (millions)

Proportion (%)

Cost Of Capital (%)

Equity:

18,0%

Tianjin Plastic

7,59