Chases Strategy for Loan

Syndication

M. Herack-520022
K.M. Haikal-822923
R.Wijaya-659459
S.Stoyanov-446714
 Project Background
Project Agreement: Hong Kong Government (HKG) and Disney agree to build a HK$ 14
billion Disney theme park & resort located at NE side of Lantau Island, Hong Kong

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Project Phase
Project Phase I: Disney style theme park & resort complex; 1 or 2 hotels; and
a dining and entertainment complex
Phase II & III: Covered possible options for developing adjoining sites to the

proposed Disney theme park & resort in the future (not entirely clear)
SPV: HKTP (company owned jointly by Disney 43% and HKG 57%)

established to construct, own and operate the theme park

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Construction Costs for HK$ 14 Billion HK
Disneyland Project
Sources of financing the HKTP Project:
The Hong Kong Government (HKG) would provide HK$ 3,25 billion
Disney would provide HK$ 2,45 billion
HKG would provide subordinated loan worth HK$ 6,1 billion
HKG & Disney would raise HK$ 3,3 billion through external means i.e.
through Chase Manhattan Bank (HK office)

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Chase Manhattan Banks (Chase) Role in Making a
Winning Bid
Out of 17 banks, Chase was awarded lead arranger of the HK$ 3,3 billion bank financing
for the construction of the Disney HK theme park & resort complex
Chases HK office tasked with executing the mandate by 2002 when the funds would be
needed
Chases strategy for making a winning bid:
1. Bid to lose by bidding aggressively but on terms that would meet Chases target earnings
2. Demonstrated flexibility on key strategic terms of the deal
3. Had strong credentials for these types of syndicated transactions
4. Had knowledge & good relationship with the Hong Kong/Asian Market
5. Agreed by firm commitment to underwrite the full HK$ 3,3 billion
6. Loan priced properly against recent similar transactions
7. Offered a deal which was dynamic and contained creative features

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

Chases Syndication Options
Option I II
Chases Role The Coordinating Arranger of
HK$ 3,3 billion
Four banks are lead arrangers i.e.
sub-underwriters of HK$ 660
billion
Syndication Allocation Chase-HK$ 300 billion
Lead arrangers-HK$ 300
million/each
Four arrangers-HK$ 250
million/each
Four co-arrangers-HK$ 150
million/each
Two lead managers-HK$ 100
million/each
Advantages for Chase Sub-underwriting the loan reduces
Chases exposure to risk of
underwriting the loan from HK$
3,3 billion to HK$ 660 million
Easier to syndicate the loan due to
sub-underwriting support
Easier for HKTP/Disney to deal
with one arranger
Disadvantages for Chase
Chase & two other banks are
coordinating lead arrangers where
each jointly underwrites HK$ 1,1
billion
No sub-underwriting
Three coordinating arrangers-HK$
300 million/each
Four arrangers- HK$ 250
million/each
Six co-arrangers-HK$150
million/each
Five lead managers-HK$100
million/each
Only two additional underwriting
commitments required unlike option I
Option II will require Chase to co-
lead the mandate with two other
banks & share underwriting fees
M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov
III
Chase is sole Lead
Arrangers/Coordinating Arranger
& underwrites the full HK$ 3,3
billion
No sub-underwriting or joint
underwriting
Chase-HK$ 250 million
Four arrangers-HK$ 250 million
each
Eight co-arrangers- HK$ 150
million each
Eight lead management-HK$ 100
million each
Sole lead arranger of the mandate and
therefore no sharing of underwriting
fees
Exposed to greater underwriting risk
Larger syndication due to the number
of participating banks
 Involved Risk (1/3)
Credit issues:
1. Disneys term sheet contained aggressive element (15 year maturity)
2. Disneys desire to use operating cash flows for expansion
3. No willing to subordinate management fees and royalties
4. No collateral other than site yet to be built
Stress testing the financial implications, Chase decided these credit issues were adequately
mitigated by the borrowers conservative capital structure and the governments commitment to
project

Result: chase resolved to show maximum flexibility by making its proposal as close as possible to
Disneys request. Include covenant requiring minimum debt service coverage ratios

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Involved Risk (2/3)
Underwrite issues: commitment to underwrite the full amount
1. Although a fully underwritten deal exposed the bank greater risk , Team seek senior
management approval
2. The proposal would show:
Chases support for the client
The confidence of the deal
Provide the greater profit for the firm
Increase the probability of winning a sole lead mandate
Credit Exposure:
Credit exposure, Chase wanted to hold on its books after general syndication
Differentiates between Underwriting Risk and Credit Risk
As lead arranger, Chase general policy was to hold 10% of the loan (depend on loan size/risk
increased)
To signal its confidence in particular deal, Chase decided to hold a final position of HK$ 300
million, slightly less than 10%.

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

Pricing
Involved Risk (3/3)
1. Benchmarking the Proposed Deal against recent comparable transaction

Chase Proposal:
Initial spread of 100
bp over HIBOR
125 bp 6th year
137,5 bp in years 11
to 15

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Term of Commitment Letter

HK$ 300 million loan

15 years final maturity/provision that allowed to start as late as 3 years after opening but due
to the leery market in the 15 years tenor, most bank loans were fully repayable in 3-5 year
Chase would underwrite the full amount
Underwriting fee between 100-150 bp
Disney plane to use operating cash flows for expansion
Avoid subordinate management fees and royalties
Include covenants requiring minimum debt service coverage ratios
Oceanfront land is a borrowers principal asset
Disneys plane to use operating cash flows for expansion
Chase propose initially the spread would be 100 bp over HIBOR, stepping up to 125 in six
year, and to 137,5 bp in year 11
Step-up pricing
Market flex provision clause

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Term of Syndication Loan (1/2)
Chase chose sub-underwriting strategy for HK$3.3 billion
1. 7 banks HK$ 600 million in return go lead arranger titles and sub-
underwriting fee of 25 bp
2. Merger with JP Morgan, six banks agree to participate at HK$ 600 million
each and the exposure scale back to HK$471 million each,
3. General syndication lead to reduce with the amount of HK$ 300 the sub-
underwriters commitments

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Term of Syndication Loan (2/2)
Chase invited 67 banks with three levels of participation:
1. Arranger tier for commitments of HK$ 250 million, up-front fee of 70bp;
2. Co-arranger tier for commitments go HK$ 150, up to fee of 60 bp
3. Lead manager tie, between HK$75 million and HK$100 million, fee 50 bp
HK$2,3billion construction term loan and HK$ 1 billion revolving credit
facility-to be received by 25 October
It had to right to close the syndication early if it received sizable
commitment quickly
General syndicate HK$5.3 billion from 25 banks, considering the HK$4.2
billion in commitment from seven sub-underwriters, Chase had approved
HK $9.5 billion an over subscription of close to three times

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Advantages & Disadvantages for Disney

Advantages Disadvantages
HK$ 2,444 of Equity The Theme Park stages rely
HK$ 3,3 billion loan from on Governments policy
Chase Bank to build Disney and loan from both Hong
Land Hong Kong Kong Government and
Bank

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

Advantages & Disadvantages for Hong Kong Government

Advantages
HK$ 3,250 of equity
57 to 75% share of HKTP
Generate employment (estimated
for 18,000 people)
Financial rate of return at least
6% to 25%
Disadvantages
HK$ 6,092 Loan for HKTP
HK$ 14 billion COST for Land
reclamation & infrastructure
development.

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov

 Deal Outcome
Option I: Sub-underwriting was selected
The deal was a major success over subscribed up to HK$ 9.5
billion from 25 banks
Breakdown of banks subscription:
- HK$ 4.2 billion subscribed by 7 Lead Arrangers/Sub-underwriters
- HK$ 5.3 billion subscribed by 25 Arrangers

M.Herack, K.M. Haikal, R. Wijaya, S. Stoyanov