Essay Project Finance

1559 Words Mar 23rd, 2011 7 Pages
1. How should PDVSA finance the development of the Orinoco Basin? Can you define project finance? Is Petrozuata a project? What are the costs and benefits of using project finance instead of the traditional (debt) finance – as Mr. Bustillos said, PDVSA could have finance the debt internally (p.7 of the case)?

Project finance is a kind of Financing that has a priority does not depend on the creditworthiness of the sponsors proposing the business idea to launch the project. Approval does not even depend on the value of assets sponsors are willing to make available as collateral. Instead, it is basically a function of the project’s ability to repay the debt contracted and remunerate capital invested at a rate consistent with the degree of
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If cash flows are lower than expected, lenders and sponsors can find it difficult to get repaid or to reach satisfying levels of internal rate of return.
– Operating risk: when the entity functions but technically underperforms
– Market risk: the revenue may be less than expected. This negative differential may be a result of overly optimistic projections in terms of quantity of output sold, sales price, or a combination of the two
• Other risks
– Interest rate risk
– Exchange rate risk
– Environment risk
– Country risk like Chang in laws, economic changes and political instability

We deem the Oil supply risk and market risk as the most significant for the project is strongly supported by the government and the two participants are all experienced except the oil supply can not be guaranteed.
The purchased agreement and payment priority referred as Cash waterfall helped to alleviate the risks.
Basically, PDVSA has to bear these risks if the project were financed entirely by internally.

3. As currently envisioned, debt will comprise 60% of the funds needed for the project. Would you recommend a higher or lower leverage ratio? What happens to the minimum debt service coverage ratio and internal rate of return (IRR) on equity as project leverage increases to 70% (80%) of project funds? Decreases to 50% (40%)?
According to M&M theory of capital structure, debt financing is highly advantageous owing to the

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