Cahse Manhattan Bank: Hong Kong Disneyland
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On August 10th 1999, Disney awarded the sole mandate to Chase Manhattan Bank for the Hong Kong Disneyland financing of HK $3.3 Billion. We believe this decision was beneficial for both parties. For Chase, the rewards included underwriting fee, interest payments, being a part of a big loan-financing project in Asia and developing networks and relationships with Asian governments and companies. This outweighed the risks of underwriting risk, credit risk and long-term collateral risk. In addition, we believe it was the correct decision to initially bid to lose and then change this approach once there was concrete support from the HK government. From Disney’s perspective, despite Chase’s standard commitment letter leaving them slightly vulnerable, choosing Chase as sole mandate made the most sense. Due to the unique nature of the loan (extreme long term, Disney’s desire to use operating cash flow for expansion and the principal collateral being non-existent for first 2 years), it made sense for Disney to choose a company that has a strong relationship with and one that was extremely flexible on the structuring of the loan. Finally, we believe the most suitable syndication strategy is to be Chase as the sole mandate with a two-stage syndication process and sub-underwriting (exhibit 8a)
Chase Manhattan Bank made a smart initial decision by attempting to bid to lose. This strategy was ideal because due to the uniqueness of the loan it posed several credit issues. Firstly it was extremely long (15 years). In addition, the problems of Disneyland Paris, which boasted large initial capital expenditures and an overly aggressive capital structure meant banks had to tread warily and do their due diligence. Also, Chase knew the local banks would bid aggressively. However, because of their strong relationship with Disney and their reputation as one of the top few syndicated loan banks in the world, it was smart to bid aggressively enough to be shortlisted but not to be a clear first option. We also agree with their decision to revise its decision and to bid to win after seeing the improvement in liquidity in local syndicated loans market and the increased support from the HK Government. The risks for the loan were clear. Like most syndicated loans, there was underwriting risk and credit risk. Underwriting risk is the risk that the market would not fully purchase the loan from the underwriter. While credit risk was the risk that Disney would not be able to service the debt.
Moreover there was collateral risk in that their fallback collateral (Disney’s principal asset) was oceanfront land that would not be built for close to 2 years. On top of that, there was the long-term maturity risk of the loan. It was a 15-year loan where repayments started as late as year 3, in comparison to most loans in emerging markets being between 3 and 5 years. Finally, there was the fact that Disney was planning to use operating cash flow for expansion, which always heightens credit risk. On the other side, the rewards were clear for Chase. Apart from the obvious underwriting fees, closing fees and interest payments, Chase would benefit largely from being involved in such a big syndicated loan in the Asian Markets. This is due to the fact that they were not currently one of the bigger players in the emerging Asian Market and this would help them raise their profile in the region and in addition develop strong relationships with the HK government and local businesses.
We would recommend Disney to sign Chase’s standard commitment letter after negotiating on the details of the standard clause. As the largest syndicated loans provider in the United States, Chase was a leader in this area around the world and its experience could help Disney succeed in this financing project. In this particular deal, it was beneficial to Disney as Chase was willing to provide the maximum flexibility based on Disney’s proposal. For example, Chase offered to fully underwrite the loan on a 15-year basis and allowed Disney’s cash flow expenditures on its future expansion. On the other hand, given the volatility in Asian banking market during that period, both the risk that Disney could get a loan, and the cost of the loan would increase as time passes.
However, there are still some parts of the commitment letter that Disney should take notice on. From Disney’s aspect of view, the market flex clause might give Chase too much power to modify the syndication after they signed the commitment letter. Even though, Chase stated they had never applied the clause in Asia, they were not guaranteed to not apply it later. Furthermore, Chase was the pioneer in the use of market flex, so they could take advantage of using it to benefit them. In order to prevent this happening, Disney should negotiate with Chase to reach an agreement that limits the extent of the market flex clause. For instance, in certain covenant, Disney could limit flex in pricing up to 10 basis points, and not permit any flex on amount of the syndication, because it would have a huge impact on the whole project. Additionally, Disney should make sure that for some key structure, and terms, Chase would come to an agreement instead of consultation with Disney before any modification.
Based on Exhibit 8, Exhibit 9 and Exhibit 10, our group would recommend the first strategy, which suggested that Chase be the sole mandate and processes the syndication with subunderwriting. This strategy was a process of two-stage syndication with 4 tiers (Coordinating Arranger, Lead arranger, Arranger, Co-Arranger, and Lead Manager). Although this strategy would make Chase share the syndication fees with other banks, it greatly reduced its syndication risk and credit risk compared to a general syndication without sub-writing. For instance, under strategy 2, the general exposure in the syndication of Chase would be $3.3 billion as there were no sub-underwriters. However, under strategy 1, this exposure to Chase would be only $660 million, as the risk would be shared among 5 other sub-underwriters. In order to better illustrate our recommendation of strategy 1, below is a table illustrates the different commitment fees and table exposures among the three strategies1:
From the table above we could see that strategy one produced a commitment fee of $13.85 million while strategy two produced only $8.78 million. In terms of the nationality and number lion of banks, under strategy 1 the total number of banks was 15, which was 3 less banks compared to the strategy 2 and even lesser than strategy 3. This to some degree helped Chase save on the fees. In addition, by processing through the two-stage sub-writing syndication, Chase could fulfill ddition, Disney’s
Disney’s preferences of having the local banks involved. By targeting at local banks at subunderwriter level, the syndication could bring more governmental support and be smoother. Therefore, strategy one is a better option in the consideration of fees, credit risk, syndication risk, nationality and number of banks.
Stefano Gatti, Project Finance in Theory and Practice, Page 371, Table C3-3
There are three main reasons why Disney awarded Chase the sole mandate. First of all, Chase had agreed to underwrite the full amount of the deal, which means it would provide full amount on pricing and term. In this way, Disney would have to deal with only one bank instead of with several banks, which greatly reduced its efforts in negotiating among different parties and simplifies the administration process. At the same time, the underwritten deals could help Disney get funding quickly. Secondly, Chase offered maximum flexibility to Disney. For example, in most cases, bank loans were fully repayable within three to five years; however, Chase was willing to offer Disney the 15-year maturity nonrecourse loan. Also, Chase accepted Disney’s oceanfront land that would be available in two years as the fallback collateral. What’s more, Chase permitted Disney to use operating cash flows for its future expansions without any burdensome covenants. Finally, Chase had earned its reputation in the industry as a leader in the field of syndicated finance, increasing the potential of a successful syndication process. Based on the reasons we listed above, we think that Disney made a good decision in choosing Chase as a sole mandate.
Stefano Gatti , Project Finance in Theory and Practice: Designing,
Structuring, and Financing Private and Public Projects.