Petrozuata: An Effective Ways of Using Project Financing
According to International Project Finance Association (IPFA) project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project. This type of financing typically attractive because the debt is off balance sheet. In other word with project financing, a project can be financed without stressing the Debt to Equity Ratio (DER) of the company.
Petrozuata, a Special Purposed Vehicle (SPV) created to develop oil drilling project in Orinoco Basin Venezuela, can even break the sovereign ceiling. The sovereign ceiling is limiting the rating of the company at maximum the same as the country in which it operates. Petrozuata is rated as AAA company while Venezuela, country in which it operates, only rated B-. Because the sovereign ceiling Petrozuata can only issue debt in B- rating, a lot higher cost of debt than it should be if it operate in United States.
To show that the project can generate steady cash flow (because cash flow of the project is the guarantee), Petrozuata did several contract to manage the risk. Considering its customer, Petrozuata made a deal with Conoco (one of its sponsor) that Conoco would buy the oil generated from the project for the first 35 years. For the completion risk, Petrozuata agreed to provide funds for cost overruns in the project. Petrozuata also make the prioritization of cash flow (waterfall) and cash trap to make the lender more secure. It also made deal with the Venezuelan government regarding its foreign currency trading. It is necessary to mention that risks peculiar to underlined financial mechanism were mitigated through a good execution plan and strong sponsor