Debt and Project

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Corporate Governance & Restructuring

Petrolera Zuata Petrozuata C.A.

Maastricht University School of Business and Economics Maastricht, 19th September 2012

Driessen, G. (i6060635) Koerselman, W. (i561398) Park, D. (i6051671)

International Business – Finance Corporate Governance and Restructuring Course Code: EBC4052 Tutor: Dr. S. Kleimeier

Case 2: Petrolera Zuata, Petrozuata C.A.

Introduction Petrolera Zuata, hereinafter referred to as Petrozuata, was the first joint venture in a series of strategic associations between PDVSA, Venezuela's state-owned enterprise entrusted with the task to "efficiently develop and manage the country's hydrocarbon resources and promote economic development", its subsidiaries and foreign companies from the oil business. More specifically, PDVSA's subsidiary Maraven would enter into a joint venture agreement with Conoco Inc., petroleum subsidiary of one of the world's largest chemical producers, E.I. du Pont de Nemours and Company (DuPont). The project targeted the Orinoco Belt, located in the middle of Venezuela, which held the largest reserves of heavy/extra heavy oil in the world. After its completion, the project would be a fully integrated facility, covering production, transportation, and refining of crude oil. After early feasibility studies in 1992, Maraven and Conoco formed Petrozuata, a project company responsible for the construction, financing and management of the joint venture. Employing project finance structure, Petrozuata was looking to cover 60% of the $ 2.425 billion financial need with debt financing. The remaining $ 975 million of equity would be provided via paid-in capital, early production cash-flows and additional equity contributions. After considering several options for debt financing, the project team decided on issuing bonds on the Rule 144A market as these bonds combined the advantages of public bonds (large amounts, long maturities, fixed interest rates, and fewer, more flexible covenants) with the advantage of speed. However, a requirement for this procedure was that the project would need to get an investment-grade rating.

1.1. What criteria do the rating agencies use to establish a rating? A credit rating is a judgment about the general creditworthiness of a debtor, or the creditworthiness of specific debt securities or other financial requirement. The credit ratings are generally used by lenders to assess if a certain potential investment is rational to make. The ultimate purpose of ratings is to protect potential lenders from making too risky investments. Therefore a rating can be explained as an indicator of the risk-level and as indicator in which degree the borrower will be able to repay their contractual obligations. The different rating agencies use somewhat similar criteria to assess a company, government or project’s creditworthiness, though there is a slight variance in the rating system. They focus on the weakest links in the project’s financing and operations, namely the sponsor's creditworthiness, the project's economics and finally the sovereign risk associated with the project. The creditworthiness of a sponsor in general is of extreme importance, as the higher the creditworthiness the smaller the probability that the sponsor would default on its contractual obligations. This is surely a factor potential creditors keep in mind when they consider investments. The sponsor's creditworthiness is particularly important for projects with low leverage as these projects strongly depend on the sponsor’s input and capacity to back up the project. Of at least same importance for a project's rating are its specific characteristics: technology, performance, competition, counterparties, forecasts of market price and demand of the output, construction and business risk are 1

thoroughly analyzed and evaluated. Last but not least, rating agencies incorporate an assessment of the sovereign risk linked to a project in their ratings,...
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