Chase-Disney Hong Kong Syndication

Q1. How should Chase have bid in the first round competition to lead the HK$3.3 billion Disneyland financing?
Why Chase initially intended to bid-to-lose?
1. The syndication term is long-term, 25 years tenor which banks did not like, and not as per the norm of the regions
syndications usual tenor of 3-5 years.
2. Disney land Paris struggles were still fresh in memory, and raised the default risk concerns for sponsors
3. 3 lead arrangers condition by the sponsor would mean a bigger portion of the overall fee would be shared.
Why Chase changed their bidding approach from bid-to-lose, to bid-to-win?
1. Liquidity improved in the local market and therefore, spreads on syndicated loans were continuing to tighten, which
mean the syndication will be more attractive to investors and lenders.
2. The senior government official underscored the governments commitment to the project at an important
conference, which brings comfort and positive point that distributors can use to ease the default risk concerns of
investors.
Although Chases bid satisfied most of the sponsors conditions, to lead the bid with the intention to win, Chase should
have bid:
1.
2.
3.
4.
5.

Total syndication mount of 3.3 b

Loan term of 15 years
Flexibility on Other covenants
Price underwriting fee 100-150 bps
Market interest rate spread need 135-150 bps over HIBOR

Of course to make this offer more aggressive, Chase could have bid:
-

A commitment to underwrite the full amount upfront

Acceptance to team up with another 2 lead arrangers
Accepted a smaller underwriting fee, probably in the range of 90-130 bps

Required smaller interest rate spread over the HIBOR for the investors, probably HIBOR +125-135 bps

In comparison with Asia Containers Terminals syndication (not rated, private company), which provided HIBOR +170-195
bps and the Mass Transit Railway (government utility entity A/A3 rated), which provided HIBOR +81.2 bps, the exact midpoint rate between them is HIBOR +131.85 bps. Therefore, the HIBOR +135-150 bps interest rate spread provided by
Hong Kong International Theme Parks Limited (which is a quasi-sovereign entity), and despite the Disneyland Paris
negative experience, is a bit on the higher side to compensate for the credit risk of the syndication and of the quality of
sponsor (Disney & HK Government).

However, The shortlisting meant that the underwriting fee requested and the market interest rate spread requested by
Chase, were within the range provided by at least the short-listed bidders, this means, on contrary, Chase had a room for
asking for a higher fee and/or a higher interest rate spread. Being a market leader, always gives this edge/right to price
oneself a bit higher than competition, lets not forget they have entered the bid at that stage to lose.

Q2. If you were Disney, would you sign the standard commitment letter? What parts might concern you and
why? If you were Chase, which parts are you willing to alter or remove and why?
If I were Disney, would I sign the standard commitment letter?
-

Of course No,
The fact that the market flex clause states that Chase shall be entitled, after consultation with Disney and the
Borrowers, to change the structure, terms and amount or pricing of the facility defies the whole purpose of the
syndication agreement, as Chase has the right to change any or all cornerstones of the agreement when it sees fit,
and the wording of after consultation doesnt restrict Chase much, as they can change even if the consultation
returned negative feedback from Disney or the Borrowers.

If I were Chase, what parts would I be willing to alter or remove and why?
-

I would be willing to change the wording, from After Consultation with Disney and the Borrower, to After Consent
of Disney and the Borrowers, this syndication can only be successful if each party is compensated enough for the
risk it is taking, and should Chase insists on having an almost free hand to make any changes, puts the
organization in an intention-questionable situation.
To mitigate the adverse movement of the Hong Kong Dollar Market, Chase can always hedge against the adverse
movement using FOREX derivatives as part of its financial design for the syndication product, or include in the
clause the right to reconvene to discuss a solution with the sponsor and borrowers, when the situation arises, with
a clear responding time-frame, and an over-ruling right to pull out if it deems unresolvable. Furthermore, the
participation of Hong Kong banks, that raise deposits in HK Dollars, will mitigate this risk largely.

Q3. What syndication strategy would you recommend for the loan and why? Be specific in terms of number of
tiers, amount of commitments and fees for each tier, nationality and number of banks, final hold positions, subunderwriting vs. general syndication, etc.
Lets start with a Pros vs Cons comparison of the syndication realities:
Pros
1. The economical outlook suggests an upcoming interest
tightening period, and an increase in liquidity supply, which
means the higher interest return spread of the syndication
than the average discussed and proven earlier, will make
the syndication a more attractive opportunity to lenders
2. The commitment feedback received from the regional
and international banks are positive and indicating 57%
oversubscription

Cons
1. The project is a real estate development in its essence,
turning a rural big peace of land into a serviced attractive
location, but will not exist (after land reclamation) before
another two years (no real asset as such)

2. if the deal went wrong HK government doesnt have

much to lose asset-wise, as they participated with the land
only, and selling such a big piece of rural land is almost
impossible or at least very difficult
3. The borrower is a company owned by HK government, 3. The difficulties and sufferings of Disney Land Euro, few
which make it quasi-governmental borrower, and Walt years back is still lingering in the memory of investors, so
Disney, one of the biggest and most recognized why should this project be any different?
corporations, enduring for almost a century with an A debt
rating
4. Chase is a market leader, with a respectful track record
4. Total syndication value is USD 423m, where in 1999
Chase managed to arrange USD 6,087m in 39 deals, that
gives an average of USD 156m per deal.
5. Including more underwriters reduces exposure risk
5. Including more underwriters reduces return
6. Including more participating banks reduces overall fund 6. Including more participating banks increases the
raising risk
arrangement and loan operational workload and cost
7. The total syndication amount is HK$ 3.3b, for a borrower 7. Hong Kong and almost all of the far-east tiger economies
whom project value is HK$ 14b, a 23.6% leverage
are still recovering from the 1997 recession
th
8. this is Disneys 8 park, supposedly a good knowhow 8. The loan had a long term of 15 years, where the regional

accumulation

norm is 3-5 year for syndicated loans, with a provision right

to start repayment after 3 years
9. HK Government commitment and agreement to provide a 9. sponsors wanted to mandate as much as 3 lead
total of HK$ 6.1b of subordinated loan to the project
arrangers, reducing the syndication payoff for Chase
In an attempt to balance the above pros and cons of the deal and its circumstances, I suggest the following strategy:
-

Peruse a Jointly-arranged syndication with one or two other mandated banks (to satisfy the borrowers condition
of including the shortlisted bidders, with whom they are keen to keep a good borrower/arranger relationship)
Chaises initial underwriting amount is therefore, HK$ 1.1b,
Peruse a General-underwriting syndication, detailed as follows:
Chaises general syndication final commitment amount of HK$ 300m,
Eliminate the sub-underwriters tier altogether
Appoint 4 arrangers each with HK$ 250m commitment, with an allocated total of HK$ 1,000m.
Appoint 6 co-arrangers each with HK$ 150m commitment, with an allocated total of HK$ 900m.
Appoint 5 Lead managers each with HK$ 100m commitment, with an allocated total of HK$ 500m.
Total participating banks are 18 banks.
Maintain a close cover ratios, including minimum debt service cover ratio of at least 1.4, an average cover ratio of
at least 1.47, and a loan life cover ratio.

According to the following tiers segregation and geographical allocation:

Chase
@ 300m
1 Chase

3
4

5
6
300

Tiers & Participating Banks Allocation

2 Mandated Lead
4 Arrangers @
6 Co-arrangers
Arrangers @
250m
@ 150m
300m
Bank of China
ABN Amro Bank Development
bank of
Singapore
Hong Kong
Citi Bank
Hang Seng
Shanghai Banking
Bank
Corporation
Fuji Bank
Bank of
Brussels
Bank of America Shanghai
Commercial
Bank
Banca De
Roma
Bank of East
Asia
600
1,000
900

5 Lead Managers
@ 100m

Geographical Allocation
USA
600

Bank of Boston

Europe

550

Bank of Montreal

Canada

100

Emirates Bank

GCC (oil rich

economies)
Asia Pacific

100

Taiwan Cooperative
Bank
United world
Chinese bank

1.950

3,300

500

Q4. What are the 6 different syndication strategies? How does each of these six different strategies affect the risks and returns Chase
might face if it is the Lead Arranger?
Strategy

Chase Strategy: Sole-arranger with Sub-Underwriting

Other mandated banks
0
Lead Arrangers (sub-UWs)
4
Arrangers
4
Co-arrangers
4
Lead Managers
2
Chase Strategy: Joint-arranger with General-Underwriting
Other mandated banks
2
Lead Arrangers (sub-UWs)
0
Arrangers
4
Co-arrangers
6
Lead Manager
5
Chase Strategy: Sole-arranger with General-Underwriting
Other mandated banks
0
Lead Arrangers (sub-UWs)
0
Arrangers
4
Co-arrangers
8
Lead Manager
8
Chase Strategy: Sole-arranger with General-Underwriting
Other mandated banks
0
Lead Arrangers (sub-UWs)
0
Arrangers
12
Co-arrangers
0
Lead Manager
0
Chase Strategy: Sole-arranger with General-Underwriting
Other mandated banks
0
Lead Arrangers (sub-UWs)
0
Arrangers
0
Co-arrangers
0
Lead Manager
30
Chase Strategy: Joint-arranger with Sub-Underwriting
Other mandated banks
2
Lead Arrangers (sub-UWs)
3
Arrangers
4
Co-arrangers
2
Lead Manager
2

Participating
Banks

3,300

Chase Exposure
in Gen.
Syndication
(HK$ MM)
660

Chase
Expected
Return (HK$
MM)
13.85

Chase Share of
Total Fee &
Commission
(of 41.25 m)
33.57%

18

1,100

1,100

8.78

21.28%

21

3,300

3,300

23.36

56.63%

13

3,300

3,300

20.25

49.09%

31

3,300

3,300

26.25

63.63%

14

1,100

550

6.89

16.72%

15

Chase Maximum
Exposure
(HK$ MM)

Effect of each strategy:

1. The maximum exposure is 3.3b is very high, although the general syndication exposure is relatively low at 660m,
chase expected return of 13.85m (33.57% of total fee) is relatively medium, and the 15 participating banks
represent fair amount of arranging and operational load.
2. The maximum exposure is 1.1b is relatively low, where the general syndication exposure of 1.1b is relatively high
comparing with strategy 1, chase expected return of 8.78m (21.28% of total fee) is relatively low, and the 18
participating banks represent fair-to-high amount of arranging and operational load.
3. The maximum exposure is 3.3b is the highest, where the general syndication exposure of 3.3b is the highest risk
possible too, however compensated by a return of 23.36m (56.63% of total fee) is quite descent, and the 21
participating banks represent high amount of arranging and operational load.
4. The maximum exposure is 3.3b is the highest, where the general syndication exposure of 3.3b is the highest risk
possible too, however compensated by a return of 20.25m (49.09% of total fee) is quite descent, and the 13
participating banks represent a fairly low amount of arranging and operational load.
5. The maximum exposure is 3.3b is the highest, where the general syndication exposure of 3.3b is the highest risk
possible too, however compensated by a return of 26.25m (63.63% of total fee) is the highest and the 31
participating banks represent a very high amount of arranging and operational load.
6. The maximum exposure is 1.1b is relatively low, where the general syndication exposure of 500m is the lowest
comparing to all other strategies, therefore, compensated by a return of 6.89m only (16.72% of total fee) which is
the lowest return, and the 14 participating banks represent a fairly low amount of arranging and operational load.