The Journey of Disney into Hong

Kong
WCA/NGC
November 13, 2017
 HK Disney
Illustrative of
The process, participants and economics of syndicated loans
Key Issues in Syndications
How many banks to invite?
What fees to offer?
What share of the loan amount to hold?
Subscription commitment to the needed loan amount
Resolutions of these questions depend on many moving parts and assessments
Economic regard
Contracting and covenants
Agency issues
Obligor
The importance of relationships in syndicated lending
Banks
Client
Project
Lending process from bank management and approvals
Arranging/underwriting.disctributing loan proceeds
Making the loan
 HK Disney Key Points
HKS Project Schedule
Syndication Process Timeline
Project Pros/Cons and Bidding Strategy
Chase choices in syndication structuring
Profitability of Chase strategy
 Introduction
August 2000

Hong Kong International Theme Parks Ltd (HKTP): an entity jointly owned by
The Walt Disney Company and the Hong Kong government a per se JV

HKTP awarded Chase Manhattan Bank the mandate to lead a HK$3.3 B bank
financing for the construction of the HK$14B HKTP resort complex

17 major banks invited to bid on deal

Disney chose Chase because of its global leadership in syndicated finance and
its firm commitment to underwrite the full loan amount

Chase responsible for raising the funds regardless of how the bank market
reacted to the deal
 Introduction
Chase HQs in NY, but HK office responsible for executing the deal
Team has delegated authority

Deliver a syndication that met both the bank markets expectations for
participation levels and credit quality , and the sponsors desire for a rapid closing
with a supportive bank group
Growth
ALM exposure
X-Border risk
X-currency risk
Public/private partnership
Direct consequences on Chases reputation as a leader in syndicated finance, its
returns as an underwriter, and its credit exposure as a lender

Alternatives:
General Syndication
2-stage Syndication, with a sub-underwriting prior to prior to general syndication

Decide:
Which banks to invite
Allocation of fees and titles
Amount of oan to retain on Chase B/S
 Introduction: Hong Kong
150 years as a British Colony

In 1997, HK became the Hong Kong Special Administrative Region

(HKSAR) within the Peoples Republic of China

Transfer of Sovereignty Agreement, China assured SAR a high

degree of autonomy under a one country, two systems concept

Some concerns: political freedoms and civil rights, but preserved

British legal system and free market economy

New govt. maintained low taxes, unrestricted capital movement, a

stable HK$, and a duty free port
Test venue of BOC and PRC hard currency on international markets
 Introduction: Hong Kong
One among the Asian Tigers

Its prosperity ranked with large countries in Western Europe

Economy:
Based on services, tourism and international trade
Few natural resources; relatively high labour costs

Asian Recession:
Thai currency crisis 1997
Unemployment rate more than doubled
GDP fell for the first time in 20 years
Stock market crashed
Tentative recovery by mid-1999
Decline in b/p remained a subject of public concern

People will rely on HK banking and Disney theme park to create more jobs
and end a slump in tourism
Capacity for more theme park resources in HK
 Introduction: The Walt Disney Company
Inception in 1923
Multinational, multimedia entertainment giant
Revenues > $20bn
Debt rating: A
Annual Operating cash flow: $5bn

Business Segments:
1. Theme Parks and Resorts
2. Media Networks
3. Studio Entertainment
4. Consumer Products
5. Internet/Direct Marketing

7 Theme parks (+4 in the works), 27 hotels with 36,888 rooms, 2 cruise
ships, 728 Disney stores, 1 broadcast network, 10 TV stations, 9
international Disney channels, 42 radio stations, 1 internet portal, 5
major internet websites, interests in 9 US cable networks, and a library
containing thousands of animated and live films and TV episodes.
 Introduction: The Walt Disney Company
Theme Parks and Resorts segment
Company owned and operated the original Disneyland in Anaheim,
California and the Walt Disney World resort complex in Orlando, Florida
US and Tokyo parks successful
Earned fees & royalties on Tokyo Disneyland(1983) and Disneyland
Paris(1992)

Disneyland Paris experienced financial problems due to:

European recession
Large initial capital expenditures
Overly aggressive capital structure, dependent upon real estate sales for
debt service (project debt = 75% of project value)
To avoid bankruptcy, had to forgo some of its management and other fees;
banks active in HK market restructured loans
Rework capital structure for major investors
3Saudi Royal Family

Importance of international growth: US gives 80% of its revenues, has

only 5% of world population
Introduction: Hong Kong Disneyland
In December 1999, Disney and the HK Govt. signed a comprehensive
agreement for a new theme park and resort complex to be located on the
north-eastern end of Lantau Island.

According to the agreement, the project would have 3 phases:

Phase I would include a Disneyland-style park with several themed lands
featuring Disney rides and attractions, as well as one or two hotels and a
retail, dining, and entertainment complex.
Phases II and III were less well defined, but included options to develop
adjoining sites at some point in the future.

Development strategy:
Learning from our experience with Disneyland Paris [a deal that experienced
financial problems shortly after opening], the strategy for Hong Kong was to
start small and then to add capacity over time as demand grew.
In fact, Phase I included plans to double capacity within the first ten years of
operations. The real keys to success are having the land available for growth
and the ability to finance this growth out of operating cash flow.
Not unlike Orlando in that respect
 Phase I: Disneyland Style Park
Theme Lands
Attractions
1-2 Hotels
Dining and entertainment complex
Schedule
Dec 1999: First Agreement between Disney and HK Government
2000: Start of land reclamation
2002: Start of resort construction
2005: Opening
 Phase II - III: Disneyland HK
Further developments as demand grows
Bad previous experience with Disneyland , Paris
Project Schedule
December 1999: First agreement between Disney and HK Government
Late 2000: start of land reclamation
2002: start of resort construction
2005: expected opening

Start small and grow over time

Jon Headley, Disney Head of Corporate Finance

 HKTP, Ltd
A JV corporation created ad hoc for the project purpose

Construct
Own Project Design/Build/Own/Run/Operate with Financing
Operate
Finance
Introduction: Hong Kong Disneyland
Because most of the construction site was currently ocean, the sponsors had to
reclaim land.
Not unlike new airport construction at HK

The HK Govt. agreed to pay for land reclamation and infrastructure development
at a cost of HK $14 billion.

According to the target dates, land reclamation would begin at the end of 2000,
resort construction would begin in 2002, and the park would open for business in
2005.

The Government supported the project because it expected the park to generate
sizable public benefits.
Jobs
Tourism $HK to HK GDP

One local economist estimated that land reclamation and construction would
generate 16,000 new jobs, while the resort would generate 18,000 jobs at opening
and up to 36,000 jobs within ten years.
Introduction: Hong Kong Disneyland
A new corporation, Hongkong International Theme Parks
Limited (HKTP), was created to construct, own, operate, and
finance the project.

It planned to raise the HK $14 billion construction cost from

4 sources:

This sum does not include an additional $14 billion of land

value and associated infrastructure development contributed
by the HK Govt.
Introduction: Hong Kong Disneyland
The HK Govt. and Disney agreed to provide equity shares of HK $3.25 billion (57%
share) and HK $2.45 billion (43% share), respectively.

In addition, the HK Govt. agreed to provide HK $6.1 billion of subordinated debt

with a 25-year maturity and repayments starting 11 years after opening day.

This left a shortfall of HK $2.3 billion (16% of total capital), which the HK Govt.
hoped to fill with some kind of external finance.

Inclusion of private sector financing would not only show that the project was
viable in the eyes of the international banking community, but would also provide
independent oversight of construction as well as monitoring of ongoing
operations.

Eventually, HKTP decided to raise HK $2.3 billion through a 15-year, non-recourse

term loan for construction and HK $1.0 billion in a 15-year, non-recourse revolving
credit facility for post-construction working capital needs.
B/S risk for HK$3.3B is on syndicate
Introduction: Hong Kong Disneyland (5/5)
Because HKTP did not need significant construction funds until after
the land reclamation was complete, it had the option of waiting
until 2002 before raising the bank debt.

By waiting, it could delay paying the commitment fees charged by

the banks.

Although it had two years in which to place the commercial loan,

the Asian loan market was showing signs of recovery by early 2000.
Knowing the structuring and syndication process could take six to
nine months, it decided to start the process sooner rather than
later.

Its fear, given the recent volatility in the Asian banking market, was
that if it waited until 2002, it might not be able to get a loan, never
mind a loan with attractive pricing.
 Winning the Mandate for Syndication
Disney Deal Team for HK$3.3 B financing:
VP, Corporate Finance and assistant treasurer
Director, Corporate Finance
Manager, Corporate Finance
Senior Analyst, Corporate Finance
VP and Counsel

Developed a Term Sheet for bank financing and contacted companys relationship
banks and other banks expert in HK syndicated loan market
There is no substitute for domain knowledge

Discussions: Get preliminary expression of interest and assessment of current

conditions in HK bank market

Disney explained: wanted to raise HK$3.3 B non-recourse loan package on a fully

underwritten basis and expected to scale up to 3 lead arrangers for the
transaction
Governance?
In the best interests of Chase?
Introduction: Chase Manhattan Bank
It was highly predictable that Disney would contact Chase Manhattan
Bank.
One of Disneys top 10 relationship banks
Chase was the third largest bank in the U.S. (> $400 B assets and $175 B
loans in 1999)
A leader in the field of syndicated finance. In 1999, lead arranger for 34%
of total syndicated loans by dollar volume in the US (nearest competitor:
21%)
Dominant in US market for loans greater than $1bn; led 47.5% of deals, 3
times more than the nearest competitor
The financial press had recognized Chases leadership with numerous
awards:
Best Loan House of the Last 25 Years 1974-1999 (International Finance Review)
Best at U.S. Syndicated Loans1999 (Euromoney)
Best Project Finance Arranger in the U.S.1999 (Project Finance)
Introduction: Chase Manhattan Bank
Not the market leader in all loan types or all locations but a
formidable competitor in most markets, including Asia

Over 400 professionals in its Global Syndicated Finance Group with

offices in London, NY, HK, Tokyo and Sydney

Each office had structuring and distribution teams

The largest syndicated lending platform in the Asia Pacific region

More people and greater coverage, so able to do the largest and

most difficult deals
 Making the Short List with HKTP
3 ways to approach a deal:
bid aggressively to win
bid less aggressively without fear of losing
no bid

Although Disney was an important global client, the deal did not seem
that attractive to Chase initially. It had a long term (15 years) which banks
dont like, it had to contend with the problems at Disneyland Paris, the
sponsors wanted to mandate as many as 3 lead arrangers which hurts its
economics, and its competitors, especially the local banks like Bank of
China and Hong Kong Shanghai Banking Corporation (HSBC), were likely to
bid aggressively

And so, it decided to bid less aggressively without fear of losing. Yet to
protect its reputation, it wanted to bid aggressively enough to make the
short list for this high-profile deal. If it happened to win the mandate, it
would have to be on terms that met our earnings thresholds
 Making the Short List
Disney Finance Team met Chase and 16 other banks in HK to review:
Key loan terms including the pricing (an unknown)
Amount (HK$3.3 B)
Maturity (15 years)
Covenants

Chase team emphasized its flexibility on key strategic terms, its credentials as a
leading syndication bank and its knowledge of and relationship with the local
market.

For Pricing, Chase indicated that it needed an underwriting fee of between 100 bp
and 150 bp, and that the market would probably require interest rate spreads of
135 to 150 bp over HIBOR to accept the deal.
Fees of bank are net income
Fees are a measure of a loan arrangers performance compensation

Although Chase expected ultimately to bid to lose, it agreed that the deal would
be much more attractive to Chase if Disney chose to award a sole lead arranger
mandate.

Disney shortlisted 5 banks for the mandate and asked them to submit final
proposal: Chase, HSBC, Bank of China, ABN Ambro, Citi Bank, and Fuji Bank.
 Preparing the Final Proposal
Chase had to assess:
Loans credit risk
Decide whether to underwrite the full amount
Commit to an underwriting fee and interest rate spread
Develop a preliminary syndication strategy

Chase came up with some creative features to improve the chances

of winning:
For example, they suggested splitting the revolving credit facility into
two parts, a HK $250 million portion that would be available for
construction cost overruns and a HK $750 million portion that would
not be available until construction was completed.
While the available portion would carry a market based
commitment fee of 37.5 basis points per annum, the unavailable
portion would carry a discounted fee of 15 basis points per annum.
Such leeway was possible given the loans seniority and modest size
relative to HKTPs total capital and commitment to the project.
 Proposal for Disney HK

Loan Spread: Proximity to the Market

Regular Market Updates to

100 bp over HIBOR Years 1-6
Disney
125 bp over HIBOR Year 7-11
Proposal with Regular Target
137.5 bp over HIBOR Years 11-15
Lists

Full Underwriting Creative Proposal

Riskier but it Revolving Credit Facility

Full underwriting Will distinguish
Chase
accepted Full Un From the other
250M HKD immediately (35 bp per
banks
annum)
750M HKD after completion of
Optimal 120-130 construction (discounted 15 bp fee
Fees
Assumed 125
per annum)
 Preparing the Final Proposal
Credit Issues:
Disneys Term Sheet contained aggressive elements, particularly the 15-year
final maturity and a provision that allowed repayments to start as late as three
years after opening. Chase expected market to be leery of 15-years term as
most bank loans were fully repayable in 3-5 years
Disneys desire to use operating cash flows for expansion (capital
expenditures)
Its unwillingness to subordinate management fees and royalties
Borrowers principal asset (fallback collateral) was oceanfront land, which
would not exist for nearly 2 years.
Reclaimed land underwater

Stress testing the financial implications, Chase decided these credit issues
were adequately mitigated by the borrowers conservative capital
structure and the govt.s commitment to the project.

Chase resolved to show max. flexibility (align its proposal to Disneys

request), include covenants requiring min. Debt Service Coverage Ratio
In corporate finance, DSCR refers to the amount of cash flow available to meet
annual interest and principal payments on debt, including sinking fund
payments. In personal finance, DSCR refers to a ratio used by bank loan
officers in determining debt servicing ability.
 Preparing the Final Proposal
Issue: Commitment to underwrite the full amount
Exposed the bank to greater risk; sought senior mgmt. approval
This proposal would:
show Chases support for the client,
signal its confidence in the deal, and
provide greater profit for the firm.
It might also set Chase apart from other banks that were unwilling to
underwrite the deal and
increase the probability of winning a sole mandate deal

Internal approval process centered on deciding:

Credit exposure that Chase wanted to hold on its books after general
syndication
Differentiates b/s underwriting risk and credit risk
As a lead arranger, Chase general policy was to hold 10% of the loan
(% declined as loan size or risk increased)
Chase decided to hold a final position of HK$300 M, slightly < 10%,
was appropriate given the 15-year maturity
 Preparing the Final Proposal
Pricing:
Standard procedure: benchmarking
Careful analysis reqd. as no two loans were exactly alike, esp. project loans
Chase proposed:
Initially, the spread would be 100 basis points over HIBOR, stepping up to 125
basis points in year six, and to 137.5 basis points in year 11.
Step-up pricing, a common feature on project loans, appeals to borrowers
who want lower expenses in the early years and who plan to refinance before
the step-ups take effect. It also appeals to lenders, who view the increases as
compensation for longer maturities and greater future uncertainty.
W.R.T. underwriting fee, they thought a no. 100-150 bp was appropriate

Its fee might be on the high end, but it didnt feel bad about this for 2
reasons:
It was not afraid to lose this deal on up-front pricing it cared about deal
quality and profitability, not deal volume.
If properly marketed, borrowers viewed the up-front fees in terms of their
annual cost, not the nominal first-year cost.
 Preparing the Final Proposal
Syndication Process:

Option# 1:
Chase would be the sole mandated lead arranger
Would invite 4 banks to act as sub-underwriters with lead arranger titles
in exchange for commitments of HK$660 M

The final allocations in the general syndication for the reqd. total of $3.3 B
would be:
Chase and the 4 lead arrangers at HK$300 M each
4 arrangers at HK$250 M each
4 co-arrangers at HK$150 M each
2 lead managers at HK$100 M

Advantages:
Administrative simplicity: Disney to deal with only 1 lead bank
Reduced underwriting risk for Chase
Possibly easier syndication given the sub-underwriter support
 Preparing the Final Proposal:

Syndication Process:
Chase
Option# 1: Loan Arranger

Lead Lead Lead Lead

Arranger 1 Arranger 2 Arranger 3 Arranger 4

Arranger 1 Arranger 2 Arranger 3 Arranger 4

Co-Arranger 2 Co-Arranger 3 Co-Arranger 4

Co-Arranger 1

Lead Manager 1 Lead Manager 2

 Preparing the Final Proposal
Syndication Process:

Option# 2:
Chase and 2 other banks would share a joint mandate and a joint
underwriting commitment, but they would skip the sub-underwriting
phase
The mandated banks (coordinating arrangers) would each underwrite
HK$1.1 B of the total amount and split the underwriting fee 3 ways

The final allocations in the general syndication would be:

Chase and the 2 other mandated banks at HK$300 M each
4 arrangers at HK$250 M each
6 co-arrangers at HK$150 M each
5 lead managers at HK$100 M

This strategy required only 2 additional underwriting commitments

instead of 4 prior to the general syndication, but it meant sharing league
table status as well as giving up two-thirds of the underwriting fee.
 Preparing the Final Proposal
Syndication Process:

Option# 2:
Other Bank Other Bank
Chase Mandate3
Mandate 2

Arranger 1 Arranger 2 Arranger 3 Arranger 4

Co-Arranger 2 Co-Arranger 6
Co-Arranger 1

Lead
Manager 1
 Preparing the Final Proposal
Syndication Process:

Option# 3: (not presented to Disney)

Combination of the first 2 options
Chase would be the sole mandated bank and it would proceed
directly to the general syndication where the final allocations
would be:
Chase at HK$300 M
4 arrangers at HK$250 M each
8 co-arrangers at HK$150 M each
5 lead managers at HK$100 M

Relative to the other 2 strategies this strategy would:

improve Chases compensation and league table status ,
but would expose it to the greatest amount of credit and syndication
risk, and
would result in the largest syndicated as measured by the no. of
participating banks.
 Preparing the Final Proposal
Syndication Process:

Option# 3: (not presented to Disney)

Chase

Arranger 1 Arranger 2 Arranger 3 Arranger 4

Co-Arranger Co Arranger
.
1 8

Lead Lead
Manager 1 Manager 5
 Preparing the Final Proposal
The key to success in this business is being close to the market. This
means being in touch with banks on a weekly, if not daily, basis.

Started with a universe of approximately 90 banks and created a

target lender list that might be interested in this deal.

Then partitioned the target list into commitment size categories

and assigned participation probabilities for each category.

This process gave it a sense of liquidity and an indication of

whether the deal will clear the market.

Based on its analysis for the Disney deal, they expected it would be
oversubscribed by 57%. This kind of analysis illustrated its closeness
to the market and its confidence in the deal.
 How to Bid for the Loan Mandate:
Risk v. Reward
Risks Rewards
Joint mandate Lower Chase wants to maintain
underwriting fees relationship with Disney
Aggressive Enhance Chase reputation in
compeititionreduction of Asia
profitability Risks but design deal carefully
Disneys less than glowing
track record Paris, Tokyo
Credit issue
Long maturity
CF to be used for Cap Ex
Not willing to subordinate Mgt
Fees and royalties to debt
service
Underwriting risk
 Chasse Syndication Strategies

One stage v. two stage

General syndication v
sub underwriting
followed by general
syndication
Set fees, titles, and
commitments for each
level
Determine loan shares
Determine invitation list
 General Syndication v Sub
Underwriting
Sub underwriting
Allows Chase to reduce
underwriting risk an
expedite syndication
process
Sub underwriting is an
optional wholesale
phase of syndication
 Set Fees
Interest spreads and
fees are set at
commitment letter
Setting commitment
amount requires
judgment inre market
appetite for deal
Determine lowest
possible fees to
generate required level
of commitment
 Chase Appetite

Chase prefers small holdings

Borrower wants lead bank to hold a large
share
Syndicate banks want originating bank to hold
large share of total loan
 Pricing Proposal
Step Up Pricing:
Yr. 1 to Yr. 6: HIBOR + 100 bp
Yr. 7 to Yr. 11: HIBOR + 125 bp
Yr. 11 to Yr. 15: HIBOR + 137.5 bp
Fees: 100 150 bp (assume 125 bp)
Full Underwriting
Revolving Credit Facility Split creative feature
HK $250 Million immediately at 37.5 bp p.a
HK $750 Million after Construction completed at 15 bp p.a
Market Flex Clause
Flexibility to react to exogenous circumstance
 Term Sheet
Loan Amount : 3.3 B HKD
Loan Tenure : 15 years
Repayments will start 3 years after opening
No subordination of management fees and
royalties
Syndication would follow sub underwriting
approach
Final bank group to be manageable
 Sources of Finance
Sources of Cash HKD M % share Remarks

Debt

Bank Term Loan 2,275 16.2 % Syndicate Loan towards

project construction
HK Government Loan 6,092 43.3 % 25 year final maturity
with repayment starting
in 2016
Sub total 8.367 59.5 %

Equity

HK Government 3,250 23.1 % Represents 57 % of total

equity
Walt Disney 2,449 17.4 % Represents 43 % of total
equity
Sub total 5,699 40.5 %

Total 14,066 100 %

1. Cost of land reclamation and infrastructure development to be

contributed by HK Govt. in exchange for non participating ,
convertible stock
2. An additional non recourse revolving credit facility of HKD 1
Billion will be arranged for working capital requirement
 Outcome for Chase
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
 Arranging the Loan
Disney chose 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 ongoing capital expenditures without burdensome
covenants.

Having won the sole mandate, Chase met with Disney to negotiate a
commitment letter with final terms, discuss the syndication strategy, and
map out a syndication timetable. As with any legal document, the content
of a formal commitment letter invariably required negotiation. From
experience, Chase knew its standard market flex provision was likely to
be one source of contention.

The market flex clause that was presented to Disney read:

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.
 Syndication Structuring Phase
Amount to be Underwritten
Conflicting Objectives
Selection of Target
Small position
Large position Lender Group:
PRO: clear signal of trust
Diversification In the project Domestic or Foreign Banks
CON: agency and incentive
problems
Chase standard policy:
Larger/Riskier Loanssmaller shares
Average final hold position 10% No currency risk
More info about project and
country
Political protection

Strategic Choice The 6 sub-underwriters chosen amongst

Local banks

It is a larger loan

Target final hold position:

9.1% (300M HKD)
Oversubscription

It is necessary to scale
Number of Banks Invited back Banks individual
Syndication: Large or Small? Commitments
Disney POV
Scale Back Criteria
Higher fees, same risk Size back from 9.5M HKD to 3.3M HKD
Greater confidentiality
Lower risk of strategic default Max closing fee 50,000 USD
More control over decisions
Increased competitiveness amongst banks Fairness
Less expensive admin
Preserves relationships with other banks Consistency
Easier to reconstruct post default
Client preferences

Greater revenues
More voice during decisions
Easier reconstruction after default
 Arranging the Loan
Although borrowers disliked the provision, its inclusion was
argued, particularly in the volatile Asian market:

Chase was the pioneer in the use of market flex terms. It makes good
business sense to include this clause, even though our competitors
sometimes use it against us in competitive mandates, because things
can change between the time you sign a deal and the time you try to
close it.

Unlike the material adverse effect (MAE) or material adverse

change (MAC) clauses, which allow us to pull a commitment, the
market flex provision is not an out. Instead, it provides room to
manoeuvre, to adjust key terms as with a bond issue.

But to date, Chase had never invoked the market flex clause in Asia.
Nor did it invoke the MAC clause, even during the Asian financial
crisis of 1997-1999, and it told this to clients.
 Arranging the Loan
After agreement on the final terms and commitment letter signed, Chase
had to select a syndication strategy.

Because Chase had committed to a fully underwritten deal, the

syndication strategy was technically their decision alone.

However, for relationship reasons, Chase knew it was important to

accommodate Disneys priorities as much as possible, and these favored a
sub-underwriting approach.

Disney requested that some of the short-list banks and some other strong
banks that did not participate in the bidding have senior status. Disney
also wanted to keep the final bank group down to a manageable size.

Syndicate structuring Trade-off:

Large syndicate generates more competition for the deal and often results in
better execution but asks for sharing of confidential information with more
people. Also, its harder to reach agreement with a larger group of banks.
Lead banks hold larger shares was desired.
 Arranging the Loan
Chase to Decide:
Whether to pursue a sub-underwriting; whom to invite as potential
sub-underwriters
Should they target local banks for participation

They didnt want the syndicate to get too big and let the
commitments get too small; they did want to give interested banks
a chance to participate

Participation by HK banks, particularly at the sub-underwriter level,

would bring greater political support for the deal and send stronger
signals for the deal and send stronger signals to foreign and smaller
local banks about deal quality.
Also easier to fund a HK dollar loan given their ability to raise HK
dollar deposits (i.e. to eliminate currency risks).
 Arranging the Loan

Chase takes its relationships with investor banks very

seriously.

It doesnt simply view them as stuffee banks, but

rather partner investors with whom a close
relationship built on trust is critical.

While it could often keep a larger slice of the pie, it

didnt want to expend any goodwill with our investors
by leaving them with the impression that it had gouged
them on fees or denied them an opportunity to acquire
a meaningful earning asset.
 Case: Part B
Chase opted for sub-underwriting strategy for HK$3.3 billion
financing
It invited seven banks to make underwriting commitments of
HK$600 million in return of lead arranger titles and sub-
underwriting fee of 25bp
Though Chase announced its merger with J.P. Morgan, six banks
agrees to participate at HK$600million each, thus forcing it to scale
back their exposures to HK$471 million each
Though the general syndication, it hoped to reduce the sub-
underwriters commitments to final hold positions of HK$300
million or less
 Case: Part B
Chase launched general syndication and invited 67 banks with three
different levels of participation
Arranger tier for commitments of HK$250 million, up-front fee of 70bp
Co-arranger tier for commitments of HK$150million, up-front fee of 60bp
Lead manager tier, between HK$75 million and HK$100 million, fee of 50bp
Commitments had to be pro rata for HK$2.3 billion construction
term loan and HK$1 billion revolving credit facility, to be received by
October 25th
It had rights to close the syndication early if it received sizeable
commitments quickly
 Case: Part B
General Syndication was success as it generated commitments
totaling HK$5.3 billion from 25 banks

Considering the HK$4.2 billion in commitments from seven sub-

underwriters, Chase had approved commitments totaling
HK$9.5billion, which was an over-subscription of close to three
times
 Phase I: Disneyland Style Park
Theme Lands
Attractions
1-2Hotels
Dining and entertainment complex
Schedule
Dec 1999: First Agreement between Disney and HK Government
2000: Start of land reclamation
2002: Start of resort construction
2005: Opening
 Phase II - III: Disneyland HK
Further developments as demand grows
Bad previous experience with Disneyland , Paris
Project Schedule
December 1999: First agreement between Disney and HK Government
Late 2000: start of land reclamation
2002: start of resort construction
2005: expected opening

Start small and grow over time

Jon Headley, Disney Head of Corporate Finance

 HKTP, Ltd
A JV corporation created ad hoc for the project purpose

Construct
Own Project Design/Build/Own/Run/Operate with Financing
Operate
Finance
 Commitment Letter
Market Flex Clause
Material Adverse Effect v. Market Flex
Is Market Flex inconsistent with underwritten
deal
Will Chase hedge interest rate risk?
Any flexibility in contracts terms?
 Syndication Process Time Line:
Summary
May, 2000 September, 2000
July, August 2000
Meet with Disney and 17 banks
Short list
Chase
Proposal deadline for Chase launches
HSBC submission sub-underwriting
Fuji Chase wins mandate effort
BOC
Chase is sole arranger
ABN
Citi
Fuji

March 2001 November 2000

October 2000

Financial closing Chase launches general syndication

Chase scales back banks
All Ts and Cs precedent inviting 67 banks
commitment
to borrowing met 25 banks accept invitation
Signing of the loan agreement
Loan can be drawn upon Oversubsciption of 5.3B HKD
Payment of underwriting and
closing fees
 Proposal for Disney HK

Loan Spread: Proximity to the Market

Regular Market Updates to

100 bp over HIBOR Years 1-6
Disney
125 bp over HIBOR Year 7-11
Proposal with Regular Target
137.5 bp over HOBOR Years 11-15
Lists

Full Underwriting Creative Proposal

Riskier but it Revolving Credit Facility

Full underwriting Will distinguish
Chase
accepted Full Un From the other
250M HKD immediately (35 bp per
banks
annum)
750M HKD after completion of
Optimal 120-130 construction (discounted 15 bp fee
Fees
Assumed 125
per annum)
 Chase Wins the Mandate
Due to
A good proposal
Disneys top 10 relationship banks
Leader in Syndication Finance
Awards from financial press
 Syndication Structuring Phase
Amount to be Underwritten
Conflicting Objectives
Selection of Target
Small position
Large position Lender Group:
PRO: clear signal of trust
Diversification In the project Domestic or Foreign Banks
CON: agency and incentive
problems
Chase standard policy:
Larger/Riskier Loanssmaller shares
Average final hold position 10% No currency risk
More info about project and
country
Political protection

Strategic Choice The 6 sub-underwriters chosen amongst

Local banks

It is a larger loan

Target final hold position:

9.1% (300M HKD)
Oversubscription

It is necessary to scale
Number of Banks Invited back Banks individual
Syndication: Large or Small? Commitments
Disney POV
Scale Back Criteria
Higher fees, same risk Size back from 9.5M HKD to 3.3M HKD
Greater confidentiality
Lower risk of strategic default Max closing fee 50,000 USD
More control over decisions
Increased competitiveness amongst banks Fairness
Less expensive admin
Preserves relationships with other banks Consistency
Easier to reconstruct post default
Client preferences

Greater revenues
More voice during decisions
Easier reconstruction after default
 Profitability of the Strategy
More Profitable Strategies

Pay lower fees to other banks

No sub-underwriters (estimated to be 119.4% more
profitable)

Why a Less Profitable Strategy?

Satisfying preference of the client

No undersubscribing risk
Keeping relationship benefits

We could have kept a larger slice of the pieBut we view having paid more in fees than we really needed to as an investment in
our relationship with other banks that are active in the market Matt Harris, Chase Securities Managing Director
 Sources of Cash M HKD*
Debt:
Bank Term Loan 2,275 M (16.2%)
HK Govt Loan 6,092 (43.3%)
Equity: 8,367 (59.5%)
HK Govt 3,250 (23.1%)
Disney 2,449 (47.4%)
(40.5%)
Total: 14,066 (100%)

Bank Term Loan 3.3 Billion HKD through syndication

Chase el al, Hong Kong International Theme Parks Limited Offering Circular. September 2000
http://news-en.hongkongdisneyland.com/
Excludes the estimated !$B HKD cost of the land reclamation and infrastructure
development to be contributed by HKTP by the Government in exchange for no participating convertible
stock
 Chase Management Commentary
Bid to Win
Manage to profitability
Win with adequate earnings thresholds

Although Disney is an important global client, the deal did hot seem that attractive to us
initiallyso we decided to bid less aggressively without fear of losing

Matt Harris
Chase Securities Managing Director
 Project Loan: Pros
Seniority relative to other debt claimants
Disney is an important Chase client
Chance to establish high reputation in Asian market
Government commitment
16% of total capital required or project exposure small relative to project size
 Project Loan: Cons
Long maturity: 15 years
3 lead arrangers requiredlower fees to Chase
Full underwriting requested
Aggressive competitive bid of local banks
Operation cash flows used for expansion
Non subordination of management fees and royalties
No collateral other than the park itself
Project has to succeed
 Current Update
2005: construction completed on time
2012: first profits earner
2013: profits doubles to ~$31M USD
2013: announced attractions expansion
2014: plans for 3rd hotel (largest of the three)