CASE ANALYSIS:

Chases Strategy for

Syndicating the
Hong Kong
Disneyland Loan
Co




Under the Guidance of Dr. B. Rajesh Kumar

Presented by:
RohithDesikan(95) Salil Srivastava(99)
Shivam Batham(107) Sudipto Banerjee(110)
Shalabh Jain(106) Yuktesh Khanna(132)
Section C

Case Highlights
Hong Kong theme park Limited is an entity jointly owned by the Hong Kong government
and Disneyland. Hong Kong theme park awarded Chase Manhattan Bank the task of
leading the construction for financing the construction of HK$ 14 billion- Disneyland theme
park and resort. Chase was selected based on their global leadership in syndicate finance and
their commitment to underwrite the full loan amount
So the main questions which the executives faced were:
i. How many banks to invite?
ii. What fees to offer?
iii. What share of loan to hold?

The solution to these questions owe their dependence to a variety of factors like economic
feasibility, risk tolerance, agency considerations along with the contracting & re-contracting
costs.
Hong Kong
Gained independence in 1997, after 150 years of British Rule. Hong Kongs prosperity
ranked it at par with the Western counterparts. Its economy was based on tourism, service
and international trade. Hong Kong fell into recession in 1997, with the unemployment rate
doubling, the GDP falling for the first time in 20 years. Thus, Hong Kong Government had
high hopes with the Disneyland Theme park, to boost tourism and also generate blue collared
jobs.

Walt Disney
Started in 1923, as an animation company, Walt Disney expanded to become a multinational
multimedia company. The current revenues are above 20 Billion USD.
Walt Disney basically produces movies and television shows. The virtual world has also
expanded into the real world- with Theme parks and Animated world styled Resorts coming
up in various parts of the world.
Disney has 7 theme parks, 26 hotels, 2 cruise ships, 728 Disney shops, 1 broadcast station
and 9 US cable networks throughout the world.

Disneyland- the theme parks have proved to be a great business strategy. All parks except
for the Paris edition have been running successfully. The main motif for bringing out the
theme park was to capture the global fan base of the Disney company. United States provides
abut 80% of the total revenues- and thus Disney wants to expand its market.
In 1999, Disneyland and the Hong Kong government signed a pact for a new Disneyland
theme and resort in the islands of Lantau. The project would have three phases:
i. Disneyland park and several theme lands featuring Disney rides and attractions.
Alos included were two hotels and a dining, retail and entertainment complex.
ii. Phase II and III were not well defined- these involved basic expansion plans.

Problems: Because most of the construction sites were mostly oceanic, the land reclamation
had to be done. The HK government agreed to pay HK4 14 Billion for the same. Disney,
suffering from the losses at Paris Disneyland- wanted to ensure that they started small and
then gradually expand their park. Land reclamation would begin in 2000 and the park would
be open to public in 2005. It was estimated that the land reclamation would involve around
16000 jobs, while the construction and final start of the theme park would ensure about
36000 jobs.

Shares: The Hong Kong government agreed to provide equity shares of HK$ 3.25 billion
(57% share) and HK$ 2.45 Billion (share 43%).
Also they HK government agreed to provide HK$ 6.1 billion of subordination debt with 25
year repayment, starting 11 years after the launch of the park.
This left a shortfall of about 2.3 billion, which was hoped to be brought by some external
finance. Eventually, the remaining sum was raised through a15 year non-recourse term loan
for construction and 1 billion in non- recourse revolving credit facility for post construction
needs.



Syndication Strategies
The following strategies can be implemented:
1. Decide on a one stage vs. two stage syndication
2. Set appropriate fees, titles and commitments for each level
3. Determine final hold positions
4. Determine an invitation list (how many banks, which banks, etc.)

Fees

Because interest rate spread and underwriting fee are set in the commitment letter, the
key decision is not how much to charge the borrower, but rather how much to share
with participating banks.
During general syndication, the goal is to determine the lowest possible fees that will
generate the required level of commitment. In a best efforts mandate, in contrast, the
lead arranger has little motivation (other than good will) to hold fees down because
the borrower is paying the banks.
Using comparable transactions analysis to set fees might be a good idea
Setting commitment amounts requires great deal of judgment regarding the markets
appetite for the deal
Titles are purely ceremonial because banks other than the lead arranger perform no
functions other than lending



Chases final hold position
Chase would prefer small holdings
Diversification and banking regulation: Global banks typically set $20 to $40
million target hold positions in large syndications
Chase could maximize its fees by distributing much of the loan to low-tier
banks
Chase wants to build a base of loyal investor banks by allocating them lots of
credit
It is common for the borrower to want the lead bank to hold a relatively large share of
the financing:
the borrower wants the bank group under strong leadership over the life of the
loan
Administrative convenience and voting control
Confidentiality
Other syndicate banks want the lead bank to hold more too:
Higher holdings signal better deal quality (remember the lead bank screens
and monitors the borrower on behalf of other lenders)
The lead bank makes more money out of the deal than other syndicate banks,
so the other banks want the lead to have higher credit risk exposure


From Chases perspective this prospective deal was interesting for the following reasons.
First of all becoming a lead arranger for a syndicated credit facility always provides a
revenue opportunity for the bank.
Furthermore, the new entity had a solid capital structure with 40% equity and also 43.3%
subordinated debt provided by the government. This meant that the new bank debt would be
the most senior piece in and would only make up 16.7% of the capital structure. Thus, the
credit risk for any credit commitment was not too high (at least when compared to other
project finance deals). Another major factor was that one of the owners was the Hong Kong
government and it was extremely committed to make this project a success. This commitment
was shown in initial capital investments of HKD 14bn funded by the government to reclaim
the land which the park should be built on. Additionally, it provided equity and the
subordinated loan to the capital structure. Overall, this project was extremely important to the
region since it would help to create thousands of jobs and spur the economy which was on a
downturn for the two most recent years. This high profile support of the government as well
as from Disney (since they didnt want another problem child like Paris) further improved the
quality of the overall deal. Additionally, as a global leader in the loan syndication market as
well as project finance provider, Chase also recognized that the Asian loan market showed
signs of recovery which should facilitate a possible syndication of such a transaction.
Nevertheless, this deal also contains significant risks for Chase. First, given that Disney is
asking for a fully underwritten deal, Chase would face underwriting risk. In case of an
unsuccessful syndication Chase would run the risk that they have to hold more of the deal on
their own balance sheet than they initially anticipated. This then would lead to increased
credit risk since they would have higher credit exposure to the company than planned
(usually a Lead Arranger of a syndicated loan has final hold target of approximately 10%; in
this case Chase set its target slightly below 10% due to the long tenor). Both of these issues
are closely linked to the profitability of the deal for Chase. In case the syndication would not
go as well as anticipated, Chase would be forced to pass on more of its upfront/underwriting
fees to other syndicate members in order to attract their interest. This in turn would not only
negatively impact Chases reputation as a leader in syndicated loans, but also reduce the
profitability for Chase and thus might not warrant their work and implied risk in this deal.
The following risks that were embedded in the deal needed to be adequately reflected in the
pricing of the deal as well as in the structural mitigants of the deal.
First, the long tenor (15 years), the historical issues around Disneyland Paris, the delayed
amortization feature, the allowed CAPEX as well as the lack of subordination for
management fees needed to be addressed in an increased margin (with step up feature) as
well as in a significant upfront fee (different levels for each commitment tier). Additionally,
the company had to pay a commitment fee for the undrawn amount during the period until the
draw down happened under the TL. Lastly, since the company asked for a fully underwritten
deal, they had to pay a fee for the related underwriting risk. In order to find what the overall
adequate pricing should be, Chase compared this deal to the other deals that had been
successfully syndicated.
Given these risks and opportunities, Chase had to make a decision how to bid for this deal.
Initially, they chose to bid to loose for the following reasons.
First of all, they needed to bid since they didnt want to jeopardize their relations and because
as a leader in the syndicated loan market it was almost mandatory for them to be part of at
least the bidding process of this transaction. They had to find a middle ground between a
structure that is not totally out of the market and one that is still profitable enough for
Chase just in case they would win the bid. Once they made it to the second round Chase
realized that the overall market conditions had further improved and that also the government
had again reiterated their support for and the importance of the deal which should further
boost the interest in the transactions. This made them change their strategy so that they were
then trying to win the bid as a sole lead arranger.
Their strategy paid off and they won the deal as sole lead arranger. In order to now
successfully execute the deal for the client while still maintaining profitability for Chase they
chose the following strategy.
They chose to invite a group of sub-underwriters which decreased the underwriting and
ultimately therefore also the credit risk for Chase.

Outcome: Sub-underwriting:
Invited 7 banks for underwriting commitments of HK$600 million
Offered lead arranger titles and sub-underwriting fees of 25 bps
6 banks agreed to participate
Launched general syndication with invitations to 67 banks:
Arranger tier HK$250 million (up-front fee 70 bps)
Co-arranger tier HK$150 million (up-front fee 60 bps)
Lead manager tier between HK$75-100 (up-front fee 50 bps)
The deal was oversubscribed: 25 banks committed HK$5.3 billion in total. Counting
the HK$4.2 billion in commitments from the 7 sub-underwriters total commitments
amounted to HK$9.5 billion.
Of the 42 banks that declined to participate, 25 cited concerns about the tenor, 8 cited
concerns over pricing.