49134195 Petrozuata Analysis Writeup
EXECUTIVE SUMMARY
Companies are increasingly using project finance to fund large-scale capital expenditures. The decision to use project finance involves an explicit choice regarding both organizational form and financial structure. With project finance, sponsoring firms create legally distinct entities to develop, manage and finance the project. Borrowing occurs on a limited or non-recourse basis and despite this, projects are highly leveraged entities. Debt to total capitalization ratios average 60-70%. The issue explored in the write up below is why firms use project finance instead of traditional, on-balance sheet corporate finance. The notion/argument that in the right settings, project finance allows firms to minimize the net costs associated with market imperfections such as taxes, transaction costs etc is explored below. At the same time, project finance allows firms to manage risks more effectively and more efficiently. These factors make project finance a lower-cost alternative to conventional corporate finance. Costs and benefits of using project finance, major risks and mitigation of these risks as well as evaluation of debt alternatives are all explored below using the Petrozuata deal as an example. PDVSA should ultimately finance the development of the Orinoco Basin using project finance and a detailed explanation can be found below.
PROJECT FINANCE – COSTS AND BENEFITS OF USING PROJECT FINANCE
Project Finance involves a corporate sponsor investing in and owning a single purpose, industrial asset through a legally independent entity financed with non-recourse debt. The decision to finance this deal on a project basis was actually a dual decision regarding both financial and organizational structure. Instead of entering into a joint venture with Conoco, PDVSA could have build the project alone and relied on spot market transactions to sell the syncrude. However PDVSA would have needed specialized assets to extract and upgrade the syncrude which would
Companies are increasingly using project finance to fund large-scale capital expenditures. The decision to use project finance involves an explicit choice regarding both organizational form and financial structure. With project finance, sponsoring firms create legally distinct entities to develop, manage and finance the project. Borrowing occurs on a limited or non-recourse basis and despite this, projects are highly leveraged entities. Debt to total capitalization ratios average 60-70%. The issue explored in the write up below is why firms use project finance instead of traditional, on-balance sheet corporate finance. The notion/argument that in the right settings, project finance allows firms to minimize the net costs associated with market imperfections such as taxes, transaction costs etc is explored below. At the same time, project finance allows firms to manage risks more effectively and more efficiently. These factors make project finance a lower-cost alternative to conventional corporate finance. Costs and benefits of using project finance, major risks and mitigation of these risks as well as evaluation of debt alternatives are all explored below using the Petrozuata deal as an example. PDVSA should ultimately finance the development of the Orinoco Basin using project finance and a detailed explanation can be found below.
PROJECT FINANCE – COSTS AND BENEFITS OF USING PROJECT FINANCE
Project Finance involves a corporate sponsor investing in and owning a single purpose, industrial asset through a legally independent entity financed with non-recourse debt. The decision to finance this deal on a project basis was actually a dual decision regarding both financial and organizational structure. Instead of entering into a joint venture with Conoco, PDVSA could have build the project alone and relied on spot market transactions to sell the syncrude. However PDVSA would have needed specialized assets to extract and upgrade the syncrude which would