Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan (A)

Q1. How should Chase have bid in the first round competition to lead the HK$3.3 billion Disneyland financing? 1.Three ways to approach this deal

1) bid to win, 2) bid to lose and3) no bid. Chase chose to bid to lose on the first round, but just enough to make it to the short list. Also, since Chase is one of Disney’s relationship banks, Chase would not want to ruin this relationship by not bidding on their project. If Chase wanted to lead the competition from the first round, they should have made a bid that was more aggressive and aimed to win. This bid would have been closer to the desires of Disney, making them more appealing and increasing their probabilities of leading the financing. However, they chose to bid to lose, with just enough terms to get into the second round to “protect their reputation”, but not to lead.

The deal started to become more attractive with the possibility of Disney awarding a sole lead arranger mandate and with the increased potential for a successful syndication. At this point, after Chase made it through the first round, they decided on a more aggressive final proposal where they would be very close to meeting most of Disney’s demands in order to win the deal. 2. Standard Commitment Letter

The standard commitment letter established by Chase for the Disneyland project would have the following terms: 1. HK$300 million loan.
2. 15-year maturity.
3. A provision that allowed repayments to start as late as three years after opening.
4. Chase would underwrite the full amount.
5. Underwriting fee between 100 bp and 150 bp
6. Pricing: Initial spread of 100 bp over HIBOR, stepping up to 125 bp in year six and to 137.5 bp in years 11 to 15.
7. Allow Disney to use operating cash flow for expansion (capital expenditures).
8. Includes covenants requiring minimum debt service coverage ratios.
9. Standard “Market flex provision” clause: “Chase shall be entitled, after consultation with Disney and the Borrower, to change the structure, terms, amount, or pricing of the Facility if the syndication has not been completed due to a change in the Hong Kong Dollar market and if Chase determines, after consultation with Disney and the Borrower, that such changes are advisable to ensure a successful syndication of the Facility”.

Q2. As Disney would you sign the standard commitment letter? Which parts might concern you and why? As Chase, which parts are you willing to alter or remove? From Disney’s standpoint, they should sign the commitment letter. Chase has had maximum flexibility with the desires of Disney. Chase has probably allowed terms that other banks would not have been so easy to accept, which might be because of the strong relationship between the bank and Disney. The only clause that might concern Disney is the “Market flex provision”. However, given how flexible Chase is being with most of the terms, it is only reasonable that they protect themselves from some of the risks involving the Hong Kong Dollar fluctuations. It is as Chandiramani, of the Chase deal team, argued: “Things can change between the time you sign a deal and the time you try close it”. On the other hand, from Chase’s point of view, they should not alter any more of the covenants of the commitment letter.

They have already been flexible enough with Disney in giving them most of their demands. However, they should be stricter regarding the repayments, since they are allowing them to start paying up to three years after opening. They should include a clause that states minimum payments as soon as the park starts running, even if they increase later to accommodate to a possibility of initial low demand. They could establish payments as a percentage of revenues or profit margin (with a minimum quantity that serves as a low boundary for payments). Then, as the park’s revenues become more stable they might establish a fixed amount (maybe after 3 years –the period in which they were supposed to start repayment). This would ensure the bank some cash flow from the beginning instead of waiting for three years after the project’s completion

Q3. What syndication strategy would you recommend for the loan? Think in terms of the number of tiers, commitments and fees for each tier, nationality and number of banks, final hold positions, sub-underwriting vs. general syndication, etc. First we consider three strategies that Chase was considering. Strategy 1–Sole-mandated with sub-underwriting

This strategy involves 4 tiers, 15 banks. Chase is the title of lead arranger, in order to protect itself from the full amount lending, they gather four other banks as sub-underwriters, so there would be 5 lead arrangers while Chase can be viewed as the sole mandate with rights to dividing all fees. There are some advantages to take this strategy: (1) Chase doesn’t have many exposure in Asian; this is a good opportunity for it to make a brand and build relationship local business. (2) Sub-underwriting allows Chase to reduce underwriting risk and expedite the syndication process. Chase should invite few local banks as arranger because they have less currency risk so they are more willing to underwrite the deal. This will make the deal more politically supportive for politicians who are willing it back up the plan. In terms of fee and fund allocation, please see appendix 1(a). For Syndication, chase has to decide the lowest amount of fees that could attract the required level of commitment. Chase forgoes HK$11 millions of fees to reduce the exposure by HK$1800million. Strategy 2– Joint-mandated without sub-underwriting

Chase is inviting two other banks to share the underwriting commitment but skip the sub-underwriting. This strategy splits the underwriter amount, so decrease the underwriting fee. No sub-writing fee means that the banks can skip the wholesale part of syndication. This will decrease the total cost which means that in case of an unsuccessful syndication Chase would not have to deal with credit exposure and credit risk. Also, Chase were welcome local bank involved due to the reason similar to strategy. The fee and fund allocation, please see at appendix 1(b), we can see that despite the Chase doesn’t have to bare so much risk, but the profits have to be shared. Strategy 3– Sole-mandated without sub-underwriting

The third strategy for Chase, as the sole mandate, is to skip the step of sub-underwriting and directly start general syndication. Besides, this strategy invites a larger number of banks could improve the competitiveness of the deal, resulting to better execution and pricing. Without sub–underwriting, this would improve the compensation for Chase. The total fees for Chase under the third strategy would reach HK$23.36 million, 69% and 166% higher than strategy 1 and strategy 2 However, more banks involved may cause higher administration costs and cooperation issues. In addition, Chase would have less controlling power. Also, the strategy may also expose Chase to large risk, as Chase is the only underwriter of the deal and would underwrite the whole amount, HK$3.3 billion. The Optimal Syndication Strategy

Syndication is generally preferred when loan size is large and borrowers have strong operational and financial record, but Disney is a new face to the HK and Disney in France has some problems. General syndication might not be the best strategy. We recommend Chase to choose strategy 1, that is sub-underwriting deal, since it can share the risk and also have proper fee return to meet Chase profit standard. As for the nationality terms, we also recommend Chase to include Hong Kong local banks, which would bring more political support and send stronger confidence to other banks about the quality of this deal.

The maximum exposure is 3,300 million is high, although the general syndication exposure is relatively low at 660 million. The expected return of 13.85 million (33.57% of total fee) is relatively medium. Chase chose this strategy at the end. Strategy 2. There are 3 mandated banks, so the maximum exposure is 1,100 million which is relatively low. The general syndication exposure of 1,100 million is relatively high comparing with strategy 1. Expected return of this strategy is relatively low. The 18 participating banks represent fair-to-high amount of arranging and operational load. Strategy 3. The maximum exposure is 3,300 million, where the general syndication exposure of 3,300 million is the highest risk possible too, however compensated by a return of 23.36m (56.63% of total fee) is quite descent. The 21 participating banks represent high amount of arranging and operational load.

The maximum exposure is 3,300 million, and the general syndication exposure of 3,300 million is the highest risk possible, too. However the high risk is compensated by a return of 20.25 million (49.09% of total fee), and the 13 participating banks represent a fairly low amount of arranging and operational load. Strategy 5. The maximum exposure is 3,300 million is the highest, where the general syndication exposure of 3,300 million is the highest risk possible too, however compensated by a return of 26.25 million (63.63% of total fee) is the highest and the 31 participating banks represent a very high amount of arranging and operational load. Strategy 6. The maximum exposure is 1,100 million which is relatively low, where the general syndication exposure of 500 million is the lowest comparing to all other strategies, therefore, compensated by a return of 6.89 million only (16.72% of total fee) which is the lowest return. The 14 participating banks represent a fairly low amount of arranging and operational load.

After Chase analysis, they excepted it would be oversubscribed by 57%. This analysis closeness to the market and their confidence in this deal. Chase has 100% participation and all of other arrangers lower participation, such as 40% of arrangers, 30% of co-arrangers and 10% of lead managers. Scale all banks back of all include sub-underwriters and by same percentage Chase decided there were leaning towards a sub-writing with fees of 95 bp for sub-underwriting commitments of HK$600 million. Of this amount, 25 bp would be on the sub-underwriting amount and 70 bp would be the closing fee on the final hold amount. For the other tiers, they would offer up-front fees of 70 bp for arranger commitments of HK $250 million, 60 bp for co-arranger commitments of HK$150 million, and 50 bp for lead manager commitment of HK$75 million to HK$100 million. Fairness, consistency and Client considerations

First come, First served. From experience, Chase knew that banks would need to make at least US$50,000 to cover the cost of analyzing and approving a project loan. Because the fees were paid on final allocations, Chase knew there might be a problem if the deal were substantially oversubscribed and the lower tiers got scaled back significantly. Successful

Chase would be the sole mandated lead arranger. Disney had to deal with one lead bank, reduced underwriting risk for chase, and possibly easier syndication given the sub-underwriter support. Chase was the pioneer in the use of market flex terms. It make good business sense to include this clause. It provides room to maneuver, to adjust key terms as with a bond issue. Chase have to share confidential information with more people. Chase invite as potential sub-underwriters which is interested banks a chance to participate. Participation by Hong Kong banks would bring greater quality. Another reason to include local banks is that they would find it easier to fund a H.K. dollar loan given their ability to raise H.K. dollar deposits. Chase current thinking, they were leaning towards a sub-underwriting with fees. The team design a combination of fees and commitment tiers that not only garner enough commitments, but also leave adequate compensation for Chase’s work as the lead arranger.

After the analysis for Disney on this deal, chase expected it would be oversubscribed by 57%. Disney choose Chase because its pricing was competitive, it agreed to underwrite the full amount, and they showed a high degree of flexibility on structuring, particularly their willingness to permit on-going capital expenditures without burdensome covenants. On the other hand, the sub-underwriting was probably unnecessary. Chase could have keep more of the fees. Chase must be solve the over-subscribed problem and have many pressure from the other banks. Finally, the key to success in this business is being close to the market. Chase do not simply view them as “stuffee” banks, but rather partner investors with whom a close relationship built on trust is critical. Chase would often keep a larger slice of the pie, chase do not want to leave our investors feeling like we had gouged them on fees or denied them an opportunity to acquire a meaningful earning assert.