FINA 3088 Case Study 1
---- Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan (A)&(B)
Bid Strategy of the First Round
The first round bid was to show its commitment and price, while detailed proposal would be submitted after being shortlisted. Thus, Chase had mainly three kinds of concern at that stage: risk, profit and reputation.
From Exhibit 6, there is no doubt that Chase was the top bank in syndicated finance in the US and over the world. However, it recorded limited performance in Asian market though Chase had put numerous resources into its global group. At the same time, Chase was among Disney’s top relationship banks and Disney as well as its project in Hong Kong had a noticeable market signal. Thus, Chase should catch this opportunity to expand its success from US market into Asian market as the Asia was expected to have a great potential growth in the coming few decades. If Chase gave it up, those local banks would definitely have a better life while Chase would face a more severe competition in syndicated business in Asia.
Whether Chase should “bid to win” or “bid to lose” depends on the risk and return of the syndication. The first question is whether Hong Kong Disneyland could generate enough revenue to cover all liabilities. As Hong Kong was just returned to China and experienced financial crisis, the Chinese government would release several policies to support Hong Kong’s economy. For example, encourage Mainland residents to visit Hong Kong since tourism is one of the main industries of Hong Kong. In addition, the performance of Tokyo Disneyland was strong evidence that Disneyland was profitable in East Asian countries.
Although the Disney theme park in Paris had faced trouble, the main reason might be aggressive plan and financial structure or strong employee rights, which was totally different in Hong Kong. The loan amount was less than 30% of the whole project (exclude government loan as it started paying after 15 years) and the Hong Kong government had shown its commitment on this project (as can be seen in the 14 billion HKD investment on land reclamation and infrastructure development). Thus, this bank loan should have a “quasi sovereign” level of credit, which means low default risk. Although the loan was nonrecourse and fully underwritten, the land, fixed assets and other collateral were possibly undervalued after the financial crisis. The Disneyland in Paris had indeed realized several years deficit, but it survived in 10 years. Therefore, the 15-year tenor should not be the major concern of this project while long term debt has a higher interest return and underwriting fee. Moreover, Chase may sell this loan on the secondary market or accept prepayments while the main profit was in the form of underwriting fee.
The third question mark lies in the expected profit. The loan amount was HKD3.3 billion which would pay a higher amount of compensation. But Chase might not keep a high return as usual, because HKTP would prefer joint mandates to insure the success of syndication and some local banks should bid for it aggressively. However, Hong Kong was facing increasing liquidity that a lower spread on HIBOR was acceptable. Thus, considering the competition of local banks and potential dilution of underwriting fee, Chase had to keep its bottom line that the bid was not too aggressive as the risk was not negligent.
Overall, the attractiveness of HKTP’s syndication was moderate to Chase. But considering its future expansion in Asia market, this business could be a milestone on its growth. Therefore, Chase should “bid to win” as it could tolerate lower profit, but had to further discuss the risk management and flexibility.
As Disney, it is very likely that we would not simply sign the standard commitment letter. We would try to use our negotiation power to amend some certain terms. The standard “market flex” provision might...
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