CASE REPORT TASK OF BANKING AND FINANCE
The Case study: Chase’s strategy for syndicating the Hong Kong Disneyland Loan (A)
Chase’s strategy for syndicating the Hong Kong Disneyland Loan (A)
Chase Manhattan was granted a deal by Hong Kong International Theme Parks Limited (HKTP) to arrange and lead the financing of a HK$3.3 billion required for the construction of the HK$14 billion Hong Kong Disneyland theme park and resort complex (Benjamin, 2003). HKTQ is an entity jointly owned by the Hong Kong Government and The Walt Disney Company. Chase was among other 17 competing banks for the deal but it was exclusively chosen by Disney due to its renowned global leadership in syndicated lending and track record of capability underwriting the full loan amount. Chase bank had more than $400 billion of assets and $175 of loans in 1999.
The construction cost of the project was HK$ 14 billion, and it would come from four sources: HK Government equity HK$3.250 billion, Walt Disney equity HK$2. 449 billion, HK Government loan HK$6.092 billion and Bank Term Loan HK$2.275 billion. The owners of the project decided to get a syndicated loan from a reputed bank citing the large size of the credit requirement (HK$ 3.3 billion), the need for greater certainty on obtaining the capital shortfall and more flexible loan structure (Benjamin, 2003).
In May 2000, the Disney finance team met with the Chase team and also with other 16 banks in separate meetings to discuss the loan terms and structure. They discussed pricing of the loan, the loan amount (HK$3.3 billion), covenants and the maturity of the loan (15 years). During the meeting, Chase emphasized on flexibility on terms of the loan, its position as a leader in syndicate banking, deep knowledge and good relationship with the local market. They quoted an underwriting fee of between 100bp and 150 bp, and a spread of 135 bp to 150 bp over HIBOR for the market to accept the deal (Benjamin, 2003). As a result, Chase was among the six banks shortlisted and notified by Disney on May to submit their final proposals by July 9.
In its final proposal, Chase put two possible syndication process in their presentation to Disney. In the first option, Chase would be the lead arranger and it would invite four banks to act as sub-underwriters and they would obtain the leader-arranger titles in exchange for commitments of HK$660 million. Chase and the four leader arrangers would be allocated HK$300 million four arrangers each HK$250 million, four co-arrangers each HK$150 each and two lead managers each HK$100 million.
Under the second option, Chase would share the mandate and underwriting commitment jointly with two other banks as coordinating arrangers. However, they would not undertake the sub-underwriting phase as in the first option. They would underwrite HK$1.2 billion each of total amount divide the underwriting fees into three (Benjamin, 2003). For the final allocations, Chase and the two other lead arrangers would allocate HK$300 million each, four arrangers each HK$250 million, six co-arrangers each HK$150 million and five lead managers each HK$100 million.
After being awarded the deal, Chase and Disney agreed on the final terms of the loan and signed the commitment letter. Chase now had the sole mandate to make a decision on which syndication strategy to use since they had committed to fully underwrite the deal (Benjamin, 2003). In my view, I would advise Chase to use the first option. This strategy would allow the bank to meet Disney’s preferences for a sub-underwriting approach. Disney had requested Chase to include in the deal some of the shortlist banks and other strong banks that had not participated in the bidding, and also give them some senior positions.
Under this sub-underwriting deal, they would design a good combination of commitment tiers and fees to garner enough commitments as well as provide enough compensation for Chase as the leader of the syndicate deal. It would moreover provide reasonable compensation for the member banks. They would sub-underwrite with fees of 95 bp for sub-underwriting commitments of HK$600 million. 25 bp would be on sub-underwriting amount whereas 70 bp would be the closing fee on the final amount. They would offer up-front fees of 70 bp for arranger commitments of HK$250 million, 60 bp for co-arranger commitments of HK$150 million, and 50 bp for lead manager commitments of HK$ 100 million.
Chase knew from estimations and prior experience that the participating banks would need to make about US$50,000 to cover the cost of approving the project under this strategy. In addition, the deal would reduce Chase’s exposure from HK3.3 billion to HK$660 million through sub-underwriting. The syndication process would also be easier as Chase would be supported by the sub-underwriting team of banks.
Benjamin, C. (2003). Chase’s Strategy for syndicating the Hong Kong Disneyland Loan (A). Havard Business School.