Australia-Japan Cable: Structuring the Project Company Introduction The case asks the team to structure a project company. As part of this task, they must identify the factors that could prevent the capital providers from earning an appropriate risk-adjusted return on their investments. They must then design an optimal governance structure to mitigate these risks to the extent possible. For example, they must decide whether to include additional equity investors (sponsors) and if so, which ones. Students must also determine the size and composition of the project's board of directors. Finally, they must structure a compensation package that encourages senior managers to maximize shareholder value. In addition, to those equity related concerns, students must assess the projects target debt-to-total capitalization ratio of 86% and the decision to pre-sell capacity as a way to transform the market (i.e.price) risk into counter-party risk. Assignment Questions 1. How would you characterize the projects assets. What makes them different or unique? 2. Who are the capital providers for the AJC project? Are they likely to earn an appropriate risk adjusted return on their investment? What potential problems could arise that would prevent them from earning a return on their invested capital? 3. How does the project structure mitigate hold-up problems? Compare against a corporate finance solution. 4. How does the project structure mitigate free cash flow problems? Would corporate finance mitigate the problems as effectively? 5. How would you structure the project company to mitigate these problems? What are your recommendations in terms of a. Ownership structure (how many sponsors and which ones)? b. Capital structure (project vs. corporate finance, leverage, type of debt, etc.) c. Organizational structure d. Board structure (how many directors? Should they be insiders or outsiders)? e. Management compensation (How much salary should you they get?) 6. Compare the proposed structure against AJC's actual project structure. How are project companies structured in practice. 7. What happened to this deal from 1999-2003