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Definition: the raising of capital to finance an investment project where the capital providers look at the cash flows

from the project as the source to:

(1) Service their loans (2) Provide the return of equity (3) Provide a return on their investment

Separate legal entity

Separate from investors and MNC

Singular focus of business Predictable cash flows from operations

Essential to securing project financing from outside partners

Finite project life

Cash flows go toward serving its capital structure (debt & equity)

Maple Energy (49% Equity) US Based company, since 1989 Subsidiary of Northern States Utility Power plant projects in four countries Truly a developer of Power plant project Tianjin Plastics (46% Equity) Government run factory Utilizes extremely energy intensive extrusion process MOPI (5% Equity) Chinese Ministry of Power Industry Wintel Capital locked in Rmb

Maple Energy (49% Equity)

Tianjin Plastics (46% Equity)

MOPI (5% Equity)


Preferred structure of Maple 1. could maintain actual control of operations 2. local partner could provide nearly equal financing and something more important than mere dollars or renminbi local participation 3. equity would make up only 15% of the total $110 million in capital needed (A diversified capital structure, both in equity and debt participation) 4. The majority of the capitalization would come from bank financing local banks, foreign banks, and international lending institutions with interests in economic development

Project life-4 year construction, 20 year operation Operating costs fixed, paid in Rmb 20yr contract for free coal feedstock (PPA Power Purchsing Agreement) Selling price of energy guaranteed (Rmb) Profits virtually guaranteed as long as debt, equity and final profit are in Rmb Forecast shows China requiring 21GW of additional power annually for a decade (150 plants of this size)

Equipment vendor Tianjin Plastics Maple Energy West Coast US Bank Total Construction Financing $ 22 Million $ 7.59 Million $ 8.085 Million $ 55 Million $93.5 Million

(10 %of the loan in Rmb) Rmb $ $ NA

Interest Rate
14% 14% 9% 9% NA

Introduction of the amount in the project 4th Year 1st Year 1st Year 2nd & 3rd Year NA

Barriers to foreign investors ROI ceiling 15% Lack of hedging options and forecast data Currency Impediments
No free convertible Rmb outlook for the value of the Rmb was uncertain

The Chinese government continued to control the

amount of Rmb converted to hard currency


Maple leaves US$ in project and cant pull them out = lose equity investment. No guarantee of re-payment of equity participation The Chinese government often refused to guarantee fulfilment of a contract such as this one, even though Tianjin Plastics was a stateowned-enterprise. Currency Exposures Firm Profitability Dollar based debt (almost 90% of debt) .Debt obligations are in US$ and will be exposed to exchange rate risk. Profit Magnitude Profits converted to dollars ROI ceiling 15%

Maple Energy does US$/Rmb loan with another

US firm doing business in China, Wintel Currency Exposures:

Profit Magnitude
Profits converted to dollars

Back-to-Back loans Mechanics: Wintel has generated profits in Rmb (cant repatriate earnings) Wintel loans Rmb70.018 to Maple for 6 years Maple loans $8.415 to Wintel for 6 years Maple: instead of converting their US$ and making the equity investment in China, Maple BORROWS the Rmb from Wintel for the equity investment Maple repays loan with Rmb from cash flows Wintel repays loan with US$

Power Price to be paid in dollars

Tianjin has already contracted to purchase most

of the power from the plant. This guarantees earnings would maintain their US$ value. Not allowed by MOPI due to concerns over negative impact it might have on their Rmb invested in project

Finance majority of project in Rmb

Maple would borrow local Rmb. No US$ exposure since Rmb (not US$) are

invested in the project. Large exchange rate risk on profit since all profits are in Rmb and must be converted to US$.

Major Problem was Chinese Currency Renminbi not freely convertible Under Strict control of Chinese Government
Barriers to foreign investors

MOPI opposed to power price paid indexed to USD Maple cannot invest directly with USD:
o Registered capital cannot be repatriated o Only profits and dividends can be returned o No repayment of equity participation

No guarantee by Chinese Govt for fulfilment of contract If Renminbi borrowed locally:

o 100% USD denominated collateral o $101.5 million deposit with Bank of China o Expensive Alternative o Currency Risk

Method employed on several occasions

Wintel not able to repatriate profits Wintel would loan Renminbi to Maple

Maple would loan USD to Wintel

Principal repayment at maturity


Risk can be divided into 2 types, Internal Risks and External Risks Operating Risk and currency conversion risk should be borne by Maple Bank would borne the commercial risk, hence a 100% dollar denominated collateral was asked by Bank of China