Project Appraisal and Financing

Submitted by:-
Group 8, Section B
Devika Sachdeva – 2016PGP117
Kalla Surya Teja - 2016PGP164
Jay Dharmamehar - 2016PGP152
Priyanka Mohanta - 2016PGP288
Rishi Raj Behra - 2016PGP315
 Project: Hong Kong Disneyland theme park and resort complex
 Project to be started from 2000, Sponsors: Hong Kong Government
and Walt Disney
 Cost of the project: HK$ 14 Billion, HK$ 3.3 Billion to be financed by
syndicated bank loan.
 Hong Kong Disneyland invited 17 major banks to bid on the project
financing and Chase was chosen as the lead arranger with a
commitment to underwrite to full amount.

Aerial view of Hong

Kong Disneyland
theme Park
Sponsors
 Hong Kong Government:
 Joined China in 1997, it has high degree of autonomy under the People’s Republic of
China.
 Free market economy, unrestricted capital movement, low tax rates

 Stable Hong Kong Dollar ( HK$ 7.80= US$ 1.00 since 1983) and duty free port

 Fell into recession following the Thai currency crisis in 1997, though some recovery seen
in mid 1999
 The Walt Disney Company:
 Established in 1923, it has become multinational, multimedia entertainment giant.

 Business segments: Theme parks and Resorts, Media Networks, Studio Entertainment,

Consumer products, and Internet/Direct marketing

 Annual revenues: $20 Billion, Operating cash flow: $5 Billion, A debt rating

 Disneyland Paris theme park had experienced finance problem due to aggressive capital
structuring
with 75% of the project financed by debt.
 To avoid bankruptcy, Disney agreed to forgo some of its management and other fees.
Project features:
 Strategy of Hong Kong Disneyland was to start small and then add capacity over time
as demand grows.
 The project would have three phases. Phase I included a Disneyland style park
offering several themed “lands’ featuring Disney rides and attractions
 Phase II and III were less defined, but included options to develop adjoining sites at
some points in future.
 Park to be constructed in coastline by reclamation of land from ocean side. H. K.
Government agreed to extend coastline
and construct roads and utilities at its expense.
 Government supported the project because of the sizable public benefits it
would generate through employment.
 Expected rate of return on investment is 17% to 25% per annum, with atleast
6% per annum under worst case scenario.
 Land reclamation work would start at the end of 2000, resort construction would
start in 2002 and the park would be ready for operation by late 2005.
Financing of the Project:
 A new corporation, Hong Kong International Theme Parks Limited (HKTP) would
construct, own and operate the resort.
 Of the total construction cost of HK$14 billion H. K .Government and Disney would
provide HK$ 3.25 billion and HK$ 2.45 billion of equity respectively. In addition to
that, H. K. Government would provide a long term loan of HK$ 6.1 billion with
repayment starting from year 16th of operation till 25th year.
 Thus HKTP was falling short of HK$ 2.3 billion. So, it decided to raise HK$ 2.3 billion
15 year, non recourse term loan for construction and a HK$ 1 billion, nonrecourse
revolving credit facility for working capital needs post construction.
 HKTP invited its relationship bankers and other bankers to raise HK$ 3.3 billion non
recourse loan package on fully underwritten basis and expected to select up to 3 lead
arrangers for the transaction.
 Chase Manhattan Bank
 One of Disney’s top 10 relationship banks.
 3rd largest bank in the US with more than US$400 bn assets and US$175 bn loans.
 Leader in the business of syndicated finance, with a 34% of total $ volume loans
 Best Loan House 1974-1999 (International Finance Review), Best at US Syndicated loans (Euromoney), Best
Project Finance Arranger in the US (Project Finance)
 Largest syndicating platform in the Asia Pacific Region

 Bid to lose Bid to win

 The deal team at Chase Hong Kong office did not feel the project attractive at the beginning.
 The deal had a long tenor, there were problems at Disneyland Paris, sponsors wanted to mandate 3 lead arrangers
and competitors were likely to bid aggressively.
 Thus, Chase decided to bid-to-lose, but bid aggressively enough so that the firm’s reputation would be preserved.
 In the meeting with Disney Finance team, the Chase team emphasized on its flexibility on key strategic terms, its
credentials as a leading syndication bank and its knowledge of relationship with the local market.
 Indicated an underwriting fee between 100 to 150 bps and interest rate spreads of 135 to 150 bp over HIBOR
 However, Chase revised its objective towards winning the mandate due to following
- Spreads on syndicated loans in local market were tightening as liquidity improved
- Senior HK official re-assured governments commitment to the project
Winning points – Fully Underwrite the loan, Market Flex options – Showed commitment towards the project
 Syndication Strategy #1

Chase Manhattan
Mandated lead arranger
HK$300mn (9.1%)

Lead Arranger 1 Lead Arranger 2 Lead Arranger 3 Lead Arranger 4

Sub-Underwriter Sub-Underwriter Sub-Underwriter Sub-Underwriter
HK$300mn (9.1%) HK$300mn (9.1%) HK$300mn (9.1%) HK$300mn (9.1%)

Arranger 1 Arranger 2 Arranger 3 Arranger 4

HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%)

Co-arranger 1 Co-arranger 2 Co-arranger 3 Co-arranger 4

HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%)

Lead Manager Lead Manager

HK$100mn (3.05%) HK$100mn (3.05%) Total – 15 banks

Syndicate Strategy -1
Initial Underwriting Sub UW General Syndication
Final
Invitatio Allocatio
No. of n n(per Total
Banks Commitment Amount Total Commitment Allocation Amount Total Commitment bank) Allocation
Chase(Underwriter) 1 $3,300 $3,300 $600 $660 $300 $300
Lead Arrangers(Sub UW) 4 $2,640 $2,640 $300 $1,200
Arrangers 4 $250 $1,000 $250 $1,000
Co-Arrangers 4 $150 $600 $150 $600
Lead Managers 2 $100 $200 $100 $200
$3,300

Per Bank Income(HK$000)

Closing Total for all

Fee Banks(HK$
UW Fees Closing Fees UW Spread Sub UW Spread Income Pool Income Total per bank
000)
Chase(Underwriter) 0.30% 0.70% $9,900.00 $1,650 $2,100 $200 $13,850 $13,850 Loan Amount(MM) $3,300 Sub-Underwriting Fee 0.25%
Lead Arrangers(Sub UW) 0.25% 0.70% $1,650 $2,100 $200 $3,950 $15,800 Underwriting fee 1.25% Total Underwriting Fees(MM) $41.25
Arrangers 0.70% $1,750 $1,750 $7,000
Co-Arrangers 0.60% $900$500 $900 $3,600
Lead Managers 0.50% $500 $1,000
$41,250
Calculation of Pool Income
General Syndication
Final Allocation(MM)
Closing Fee Closing Fees per Bank(HK$000)Ttoal Closing Fees for All banks(HK$000)
Total Closing Fee Income Available 0.70% $3,300 $23,100
Chase 0.70% $300 $2,100 $2,100
Lead Arrangers(Sub UW) 0.70% $300 $2,100 $8,400
Arrangers 0.70% $250 $1,750 $7,000
Co-Arrangers 0.60% $150 $900 $3,600
Lead Managers 0.50% $100 $500 $1,000
$22,100
Pool Income $1,000
 Syndication Strategy #2

Bank 2 Chase Manhattan Bank 3

Mandated lead arranger Mandated lead arranger Mandated lead arranger

HK$300mn (9.1%) HK$300mn (9.1%) HK$300mn (9.1%)

Arranger 1 Arranger 2 Arranger 3 Arranger 4

HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%)

Co-arranger Co-arranger
Co-arranger 1 Co-arranger 2 Co-arranger 3 Co-arranger 5
4 6
HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%)

Lead Manager Lead Manager Lead Manager

Lead Manager 3 Lead Manager 5
1 2 4
HK$100mn (3.05%) HK$100mn (3.05%) HK$100mn (3.05%) HK$100mn (3.05%) HK$100mn (3.05%)

Total – 18 banks
 Syndication Strategy #3

Chase Manhattan
Mandated lead arranger
HK$300mn (9.1%)

Arranger 1 Arranger 2 Arranger 3 Arranger 4

HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%) HK$250mn (7.6%)

Co-arranger
Co-arranger 1 Co-arranger 2 Co-arranger 3
4
HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%)
Co-arranger
Co-arranger 5 Co-arranger 6 Co-arranger 7
8
HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%) HK$150mn (4.5%)

Lead Manager 1 Lead Manager 2 Lead Manager 3 Lead Manager 4

HK$100mn (4.5%) HK$100mn (4.5%) HK$100mn (4.5%) HK$100mn (4.5%)

Lead Manager 5 Lead Manager 6 Lead Manager 7 Lead Manager 8

HK$100mn (4.5%) HK$100mn (4.5%) HK$100mn (4.5%) HK$100mn (4.5%)
Total – 21 banks
What Happened:
 Sub-underwriting strategy for HK$3.3 billion financing
 Invitation to 7 banks to make commitment of HK$600 mn
 Benefit would be in form of lead arranger titles and sub-underwriting fees of 25 basis points.
 6 banks agreed to participate in the deal at HK$600 mn, forcing Chase to reduce the exposure to HK$ 471 mn ( 0.471*7= 3.3 bn)
 General Syndication
 Invitation to 67 banks with 3 level of participation
 Arranger for HK$250 mn commitments with a upfront fees of 70 bp
 Co-arranger tier for HK$150 mn commitments with a upfront fees of 60 bp
 Lead Manager tier for HK$ 75 mn – HK$ 100 mn commitments with a upfront fees of 50 bp
 All commitments to be pro rata basis for KH$2.3 bn and revolving credit facility of HK$ 1 bn.
 General syndication was a success with commitment of HK$5.3 bn from 25 banks. Credit commitments
totalled HK$9.5 bn, with over subscription of three times.
 Basis for dealing with over subscription. Criteria selected
 Fairness- Giving banks as close to what they committed
 Consistency- Scale back is consistent for all banks within a given tier
 Client Consideration – Giving appropriate weight to client’s preference.
THANK YOU