Chase’s Strategy for Syndicating

the Hong Kong Disneyland Loan

We are investment bankers, not commercial bankers, which means that

we underwrite to distribute, not to put a loan on our balance sheet.
– Matt Harris, MD, Chase Securities

Project Appraisal and Finance

Group 14 | Section A
Ankit | Inderpreet | Indu | Khalid | Mohit
 Introduction: Case (1/2)
• August 2000

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

• HKTP awarded Chase Manhattan Bank the mandate to lead a HK$3.3 bn bank
financing for the construction of the HK$14 bn HKTP and 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: Case (2/2)
• Chase HQs in NY, but HK office responsible for executing the deal

• Deliver a syndication that met both the bank market’s expectations for
participation levels and credit quality , and the sponsor’s desire for a rapid
closing with a supportive bank group

• Direct consequences on Chase’s 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:
– Banks to invite
– Allocation of fees and titles
– Loan to retain on B/S
 Introduction: Hong Kong (1/2)
• 150 years as a British Colony

• In 1997, HK became the Hong Kong Special Administrative

Region (HKSAR) within the People’s 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
 Introduction: Hong Kong (2/2)
• 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

• 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 o/p remained a subject of public concern

• People on HK banking on a Disney theme park to create more jobs and

end a slump in tourism
Introduction: The Walt Disney Company (1/2)
• 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 n/w, 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 (2/2)
• 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

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

has only 5% of world population
Introduction: Hong Kong Disneyland (1/5)
• 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
northeastern 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.
Introduction: Hong Kong Disneyland (2/5)
• Because most of the construction site was currently ocean, the
sponsors had to reclaim land.

• 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.

• 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 (3/5)
• 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 (4/5)
• 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.
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
• Disney Deal Team for HK$3.3 bn 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 company’s

relationship banks and other banks expert in HK syndicated loan market

• Discussions: Get preliminary expression of interest and assessment of

current conditions in HK bank market

• Disney explained: wanted to raise HK$3.3 bn non-recourse loan package

on a fully underwritten basis and expected to scale up to 3 lead arrangers
for the transaction
Introduction: Chase Manhattan Bank (1/2)

• It was highly predictable that Disney would contact Chase Manhattan

Bank.
• One of Disney’s top 10 relationship banks
• Chase was the third largest bank in the U.S. (> $400 bn assets and $175 bn
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 Chase’s leadership with numerous
awards:
– Best Loan House of the Last 25 Years 1974-1999 (International Finance Review)
– Best at U.S. Syndicated Loans—1999 (Euromoney)
– Best Project Finance Arranger in the U.S.—1999 (Project Finance)
Introduction: Chase Manhattan Bank (2/2)

• 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 (1/2)
• 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 tenor (15 years) which banks
don’t 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 (2/2)
• 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 bn)
– 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.

• Although Chase expected ultimately to bid to lose, it agreed that the deal
would be much more attractive 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 Amro, Citi Bank, and Fuji
Bank.
 Preparing the Final Proposal (1/8)
• Chase had to assess:
– Loan’s 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 loan’s seniority and modest size
relative to HKTP’s total capital.
 Preparing the Final Proposal (2/8)
• Credit Issues:
– Disney’s 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 tenor as most bank loans were fully repayable in 3-5
years
– Disney’s desire to use operating cash flows for expansion (capital
expenditures)
– Its unwillingness to subordinate management fees and royalties
– Borrower’s principal asset (fallback collateral) was oceanfront land,
which would not exist for nearly 2 years.

• Stress testing the financial implications, Chase decided these credit

issues were adequately mitigated by the borrower’s conservative
capital structure and the govt.’s commitment to the project.

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

Disney’s request), include covenants requiring min. DSCR
 Preparing the Final Proposal (3/8)
• Issue: Commitment to underwrite the full amount
– Exposed the bank to greater risk; sought senior mgmt. approval
– This proposal would:
• show Chase’s 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 centred on deciding:

• Credit exposure chase wanted to hold on its books after general
syndication
• Differentiates b/w 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 mn, slightly < 10%,
was appropriate given the 15-year maturity
 Preparing the Final Proposal (4/8)
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. b/w 100-150 bp was appropriate

• Its fee might be on the high end, but it didn’t 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.
– Second, 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 (5/8)
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 mn

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

• 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 (6/8)
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 bn 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 mn each
– 4 arrangers at HK$250 mn each
– 6 co-arrangers at HK$150 mn each
– 5 lead managers at HK$100 mn

• 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 (7/8)
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 mn
– 4 arrangers at HK$250 mn each
– 8 co-arrangers at HK$150 mn each
– 5 lead managers at HK$100 mn

• Relative to the other 2 strategies this strategy would:

– improve Chase’s 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 (8/8)
• 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 approx 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.
 Arranging the Loan (1/)
• 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.”
 Arranging the Loan (2/)
• 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
maneuver, 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 (3/)
• 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 Disney’s priorities as much as possible, and these favoured
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, it’s harder to reach agreement with a larger group of banks.
– Lead banks hold larger shares was desired.
 Arranging the Loan (4/)
• Chase to Decide:
– Whether to pursue a sub-underwriting; whom to invite as potential
sub-underwriters
– Should they target local banks for participation

• They didn’t 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).
• <<<<<<<<<ADD>>>>>>>>>
 Arranging the Loan (5/)

• Chase takes its relationships with investor banks very

seriously.

• It doesn’t 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

didn’t 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 (1/)
• 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 (2/)
• 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 (3/)
• 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