Summary of Financing Issues in Tianjin Plastics Essay
Project finance has been in existence for the longest time. The history of humankind is awash with project finance events. There are little changes in the manner in which project finance has been in the in history and the modern contexts. Nevertheless, each individual project is very different from any other project in existence. Projects have similar characteristics through. Lenders need to feel secure of being repaid while providing capital for any project. Banks do not provide venture capital and therefore do not take up risks considered to be investors’ responsibility. There are certain characteristics that make projects for financing such as strong credit backing, existence of credit risk only, financial viability, existence of supply contracts as forecasted costs, assured market, acceptable contractor, availability of financial expertise, capable operator, proven technology, proper equity contribution, adequate insurance, and relevant government approval.
Tianjin Plastics joint venture was considered an important port and industrial city in the Northern China. The enterprise was owned by the government and it utilized a high level of energy-extrusion process for producing various raw industrial plastic products. Operating pro forma financial statements for the project had forecast an operating margin of 178,000,000 Chinese renminbi (Rmb) as from the year 2000. The operating margin was anticipated to increase at a rate of 3% annually. For the first six years, the project was to enjoy a tax holiday and thereafter face a tax rate of 40% in corporate income. The payment of principal and interest would start in 2000. For the subsequent 10 years, depreciation was estimated at Rmb98,000,000 annually; which was not included in the estimation of operating income. The Chinese government required that reinvestment was undertaken on the annual depreciation equal to 25%. At the end of the investment, depreciation would not be recaptured.
The joint venture would be split 46% Tianjin Plastics, 5% MOPI and 49% Maple. Therefore, Maple would have the controlling interest. In the financing arrangements, the project would use $93.5 million in construction which would be from a combination of loan from Tianjin $7.59 million, Maple Energy $8.085 million, equipment vendors $22.0 million, West Coast U.S. Bank $55.0 million. The three main financiers would convert their loan into equity upon completion. 10% of the loan from vendors’ loan was in renminbi as was the loans from Tianjin Plastics and MOPI. Tianjin Plastics and Maple were to provide completion guarantees to the bank. Loans denominated in local currency attracted a 14% interest rate while those in U.S$ had 9% rate. A club syndication loan from three banks was used for post-completion financing of $117.4 million. The banks had experience in project financing in China. The syndicated loan was structured into two tranches namely: $33 million and $57 million respectively. While the first tranche was project supported/sponsored limited recourse loan, the second was non-recourse loan. The first tranche was charged 0.95% over six months LIBOR for a period of 6 years. The price of the second tranche was to be paid within 10 years at a rate of 1.75% over 6 months LIBOR. The syndicate loan was denominated in US$. Currency problems faced the project due to lack of free convertibility of the Chinese renminbi. Various barriers existed in China for investors such as limited return on investment of such projects, refusal by Chinese government to guarantee contract fulfilment on such projects failure to allow registered capital by the Chinese government. A problem also existed in the equity investment repatriation. Furthermore, the renminbi presented a major currency risk problem.