CHASE’S STRATEGY FOR SYNDICATING HONG KONG

DISNEYLAND LOAN - Group2

• Nidhi Agarwal
• Sagar Rathee
• Kashish Jain
• Soumi Basu
• Sumit Kumar
• Akshay Bundela
Introduction
● Main issue- How Chase will go about handling the HK$3.3 billion bank financing for the
construction of the HK$14 billion Hong Kong Disneyland theme park and resort complex.
● Much of how the handling would take place started at the bidding table when Chase along with
16 other major banks was invited to bid on the deal.
● In the initial rounds of the proposal, Chase went over the key loan terms and emphasized its
flexibility on those terms, and most importantly, its knowledge of and relationship with the local
market.
● After making the shortlist, in the final proposal, chase offered up two options,
○ Chase being the sole mandated lead arranger
○ Chase sharing the load with two other banks as a joint mandate
● After winning the bid Chase looks at how to arrange the loan in terms of who it wants to allow as
sub-underwriters and the pros and cons of its decisions.

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Why was Chase invited to bid?
● One of Disney’s top 10 relationship banks
● 3rd largest bank in the United States with more than $400 billion of assets and $175 billion of loans in 1999,
and was a leader in the field of syndicated finance
● In 1999, Chase was the lead arranger for 34% of total syndicated loans by dollar volume in the world’s
largest market, the United States, compared to 21% for the next largest competitor
● In the U.S. market for loans greater than $1 billion, its dominance was even more pronounced: it led 47.5%
of the deals, three times more than its 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), and
Best Project Finance Arranger in the U.S.—1999 (Project Finance).

“We have by far been the largest syndicated lending platform in the Asia Pacific region. Because
we have more people and greater coverage, we are able to do the largest and most difficult deals.” -
Matt Harris (led structuring team in HK, Chase)

Initially, Chase didn’t find the opportunity much viable and therefore weren’t much interested in bidding.
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First Round Bid From Chase
● The three different types of bid Chase can go for are : bid to win, bid to lose and no bid
● DisneyLand Hong Kong had to win bid to win to maximize their core potential from the market
● Chase decided to finance the project which required a huge financing of HK$3.3 billion
● Chase analysed the Disney system in two ways :
○ First it analysed the financials of the company with ratio analysis. They did so by analysing the
profitability, efficiency and the solvency ratio of the company
○ Secondly Chase analysed the company via the Current ratio and Quick Ratio so as to know the
liquidity position of the company
● Both of the above mentioned ratios were essential in analysing the position of the company in meeting short
term financial promises
● The strategy found was very efficient and interactive for the company through which it could sustain the
position in the market with sheer attentiveness
● The above analysis helped Chase gain a comprehensive knowledge about the positioning of Disney in the
market and their capability to pay back the loan

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Approaches for Bidding
Chase was plagued by two main factors- did not want to sour the relationship between Disney and wanted to build a
reputation in the Asian Market

1. No Bid Approach

Initially, Chase was not interested in the Hong Kong Disneyland deal due to the following reasons:

a. Division of mandate among the three lead arrangers made the deal less attractive for chase

b. Presence of competitor banks like Bank of China and HSBC who wanted to bid aggressively to win the deal
made Chase realise poor potential returns

c. Financial difficulties after opening of Disneyland Paris, the last theme park also reflected the credit risk and
underwriting risk in syndicating the loan

d. Fully underwritten deal was posed to greater credit and syndication risk for a volatile market like Hong Kong

1. Bid to Lose Approach

Reason for choosing this approach was:

a. Chase can save its face as a relationship bank and also get prevented from the credit and underwriting risk in 5
the deal
3. Bid to Win Approach
Required aggressive bidding with competitive pricing. There were quite a few reasons for Chase to
choose this approach-
a. Disney was one of the most important client of Chase
b. The H.K. Disneyland project was going to be a marquee deal for the region and failure to
win the mandate could tarnish Chase’s reputation as one of the region’s leading banks
c. Pressure to bolster the position in Asia, being a global leader in syndicate loan
arrangement provided Chase an opportunity to win the deal following the decline in
lending and construction after Asian Crisis
d. Project credit risk was lower than perceived due to Hong Kong Government’s backing to
the project
e. Improvement of liquidity post recovery from Asian Crisis made the deal more attractive

Thus, at the end, Chase decided to choose bid to win approach.

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Deal Evaluation
The deal can be evaluated using three major options :

● First option : Chase and four lead arrangers would provide HK$300mn each, four arrangers at HK$250mn
each, four co-arranges at HK$150mn each and two lead managers at HK$100mn each would sum up to
HK$3.3bn. The advantages of this deal are that Disney would deal with only one lead bank and there would
be administrative simplicity.
● Second option : Chase and two other mandated banks would provide HK$300mn each, four arrangers at
HK$250mn each, six co-arrangers at HK$150 each and five lead managers with HK$100mn each. This
method required only two additional underwriting instead of four like the previous case and hence reduce
underwriting fees.
● Third option : The final option was a combination of the first two options. Chase would be the sole
mandated bank with HK$300mn, four arrangers at HK$250 each, eight co-arrangers at HK$150mn each
and eight lead managers with HK$100mn each. This would increase Chase’s league table status but would
expose it to the maximum amount of credit and syndication risk.

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Signing the Standard Commitment Letter
Chase had given maximum flexibility with the desires of Disney. Their major concern with signing the letter given the
15-year term was:

● Material Adverse Change Clause - Standard Committee Letter is a legal

○ Underwriter can withdraw commitment document in which all the terms and
● Market Flex Clause conditions of the deal is mentioned.
○ Chase can alter terms during underwriting period (4+ weeks) It is a regular and legal practice that
○ Converts underwriting into best-efforts deal has to be completed by every
○ Definition of material adverse change company whenever they are likely to
○ Volatility of Hong Kong dollar (Exh 1 & 2) get loan for the project financing
○ Hedging risk in market not easy due to uncertain drawdown purpose.

Chandiramani argued for its inclusion:

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
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“material adverse change” (MAC) clauses, which allow us to pull a commitment, the market flex provision is not
Recommendations
● Recommended Syndication Strategy can be a Competitive strategy
● Under which Chase has to do some research in order to analyses the current conditions of granting the loans
● a strategy that maximizes Chase’s share of management fees considering the acceptable level of credit and
underwriting risk, and also the concern to have more than one lender (sub underwriting)
○ In setting the fees the target range was 100 bps to 150 bps and we would recommend the mid-point
125 bps.
○ To manage credit Chase should get as much commitments from sub-underwriters so that their
resulting commitment (Chase) would be less than 10% of the deal (HK330 million)
○ For smooth flowing of the deal, Chase must ensure that at least 60% of the commitments are in the
hands of fewer senior sub-underwriters.
○ Each invited bank should end up with fees of at least US$50,000
● We find that Chase did not come up with an optimal syndication strategy
● And ended up committing at least HK $ 417 million (14%) of the loan which was above their required limit
of 10%.

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THANK YOU

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