Hong Kong Disney Case Study

Initiation of the Project

In December 1999， Disney and the Hong Kong government signed an agreement to build a new theme park and resort complex. This project needed HKD 14 billion, funded by HK government, Disney and bank term loan of HKD 2.3 billion. After serious considerations, HKTP awarded Chase Manhattan Bank the mandate to lead a HK$3.3 billion bank financing for the construction of the program.

Hong Kong Disneyland finance team met separately with Chase and 16 other banks in Hong Kong for the HKD3.3 billion financing during May 2000. In the first round competition, as the deal had an unfavorable long tenor and Disney had previous problems with Disneyland Paris, Chase decided to bid to lose in the first round competition. As local banks like Bank of China and HSBC were likely to bid aggressively, Chase chose to also bid aggressively enough to make the short list to protect their reputation. If they happened to win the mandate, it would have to be on terms that met their earnings targets.

Chase's concern for the bid

On Chase's side, Chase needed to evaluate the risks (credit and syndication) and returns (financial and reputational). For clarity and simplicity we list the pros and cons that Chase was facing in the following table:

RISK REWARD

Credit and Downgrade risk -This arises from the level of exposure that Chase would take in the HK$3.3 billion loan. Usually they only locked themselves in 10%. High Profit is Chase's sole mandate

Underwriting risk--The issue may be undersubscribed which leads to Chase taking up the balance loan amount. First mover advantage in the emerging market

Political Risks---Hong Kong government may back track on their promises, besides the government might pressure them to include local banks in the syndication. The bid should maximize their underwriting fees and also add a quality loan asset in the portfolio of Chase.

Liquidity risk ---The higher the exposure to the loan, the higher their liquidity risk. Since the maturity is 15 years and the project is in an emerging market where the level of players is not sufficient to match liquidity levels of developed markets. Disney is an important client that Chase would like to maintain a great relationship with

Reputational risk--Chase would put a bid that is unfair to other counterparts, this would taint their standing in the finance industry.

No collateral other than site yet to be built

Chase would like to take the deal with HKTP. In May 2000, HKTP had several negotiations with Chase and other 16 other banks to review key loan terms. During the meeting, Chase focused on its flexibility on key strategic terms and its credentials as a leading syndication bank. Thus, when Chase came down to the phase of arranging the loan with Disney, they came out with their standard market flex clause due to its concern for this particular project: 1. Chase can change terms during underwriting period 2. Volatility of HK markets (Exhibit 1 & 2) 3. Hedging risk in market not easy due to uncertain drawdown 4. Flex provision common in other (albeit less volatile) markets

Disney, on the other hand, faces the risk of changes in loan structures, terms or pricing as long as Chase figured a need of renegotiation. Yet if Disney refuses to collaborate on this clause, they face the risk of failure in closing the deal which may force them to mandate other banks. Such a move would lead to potential problems such as a higher yield, only partial amount being underwritten or strict covenant requirement for ongoing capital expenditures.

Chase's pricing strategy & Risks

Based on the comparable transactions that occurred during the last several years, Chase proposed an initial spread of 100bp over HIBOR, stepping

up to 125bp from year six, and 137.5bp from year 11. The step-up feature appeals to both borrower and lender since the former party will be able

to refinance before the step-ups take effect, and the latter views the increase in rate as compensation for longer maturities and future uncertainty.

Matt Harris felt comfortable about the fee they charged even though it may be on the high end. As he said:" we were not afraid to lose this deal on

up-front pricing - we care about deal