Hk-Disney Syndication by Chase

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Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan Group 15

XIA Yidan, ZHANG Kuo, ZHU Shihuai, WANG Qian

2012
acer
CHUK
2012/9/24
Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan Group 15

XIA Yidan, ZHANG Kuo, ZHU Shihuai, WANG Qian

2012
acer
CHUK
2012/9/24

How should Chase have bid in the first round competition to lead the HK$3.3 billion Disneyland financing (Bid to win or bid to lose?) In the first round of competition, there are 17 banks competing to propose a mandate for syndication. How should Chase make the proposal to Disney depend on the following respects: (1) Disney’s requests (2) Evaluation of the returns and risks. Based on the previous two parts, design the bidding strategies.

(1) Disney’s requests
According to the term sheet developed by Disney for the loan transaction, Disney’s main request for the bank financing can be summarized as follows: a. Amount: HK $3.3 billion
b. Underwriting method: full underwrite
c. Tenor: 15 years
d. Number of lead arranger: up to 3
e. Seniority: management fees and royalties ahead of debt service

(2) Evaluation of the return and risk

* Fees for syndication services and reputation gain
The fees for syndication services are closely related to the syndication structure. For full underwriting, Chase would get the whole underwriting fee if it is the sole mandate. However, Disney prefers to mandate up to 3 lead arrangers, and Chase will have only 1/3 of underwriting fee in this case. Further, being lead arranger has reputation gain for Chase. But trying to be the sole mandate and lead arranger put the pressure on Chase to bid aggressively. Especially they expect local banks were tend to make an aggressive bidding, whether bid to lose or bid to win is largely decided by the interest rate risk, credit risk and syndicate risk.

* Interest risk
The bank loan has two parts: HK$2.3 billion, 15-year nonrecourse term loan for construction need and HK$1.0 billion, nonrecourse revolving credit facility for working capital needs. At the view point of Disney, the future loan market will be volatile and less liquid. Thus they want to raise money as soon as possible for future use. As the maturity of loan is long (15 years), Chase should ask for a higher than average spread over HIBOR to make the payoff acceptable by market, given a negative expectation of future loan market. However, Chase got a second opinion after analysis. The spreads on syndicated loans in local market were continuing to tighten as liquidity improved. From the Exhibit 2, we could see that the HIBOR rate is about 6% at early 2000, far below the peak of over 15% during 97s. Holding positive expectation about liquidity, there is room for Chase to bid aggressively. In another word, the proposed interest rate spread could be lowered to cater Disney and without assuming too much interest rate risk, which could help Chase beating other proposals.

* Credit risk
Disney is a multinational, multimedia entertainment giant with revenues in excess of $20 billion, an “A” rating, and more than $5billion in annual operating cash flow. Although it seems that Disney has low credit risk as a whole, it could encounter financial problems if the financing structure is too aggressive. For example, Disney Paris had project debt accounted for 75% of project value and experienced financial problem when European recession posted a negative impact on it. First we start with the financing structure of this project. As shown in chart 1, it has modest debt financing (debt account for 59% of project value) and 43% of the project value is going to finance by HK government loan (72% of total debt financing). The government loan is 25-year maturity with repayment beginning in 2016, fully subordinated to the bank loan. Further, because of convertible securities, HK government’s financial equity holding would increase from 57% to 75%. What’s...
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