MF 820: Management of Financial Institutions
Hong Kong Disneyland Finance
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...
References: Stefano Gatti , Project Finance in Theory and Practice: Designing, Structuring, and
Financing Private and Public Projects.
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