Cahse Manhattan Bank: Hong Kong Disneyland Essay Sample
On August 10th 1999. Disney awarded the exclusive authorization to Chase Manhattan Bank for the Hong Kong Disneyland funding of HK $ 3. 3 Billion. We believe this determination was good for both parties. For Chase. the wagess included underwriting fee. involvement payments. being a portion of a large loan-financing undertaking in Asia and developing webs and relationships with Asiatic authoritiess and companies. This outweighed the hazards of subventioning hazard. recognition hazard and long-run collateral hazard. In add-on. we believe it was the right determination to ab initio offer to lose and so alter this attack one time there was concrete support from the HK authorities. From Disney’s position. despite Chase’s standard committedness missive go forthing them somewhat vulnerable. taking Chase as exclusive authorization made the most sense. Due to the alone nature of the loan ( utmost long term. Disney’s desire to utilize operating hard currency flow for enlargement and the chief collateral being non-existent for first 2 old ages ) . it made sense for Disney to take a company that has a strong relationship with and one that was highly flexible on the structuring of the loan. Finally. we believe the most suited syndication scheme is to be Chase as the exclusive authorization with a two-stage syndication procedure and sub-underwriting ( exhibit 8a )
Chase Manhattan Bank made a smart initial determination by trying to offer to lose. This scheme was ideal because due to the singularity of the loan it posed several recognition issues. Firstly it was highly long ( 15 old ages ) . In add-on. the jobs of Disneyland Paris. which boasted big initial capital outgos and an excessively aggressive capital construction meant Bankss had to step warily and make their due diligence. Besides. Chase knew the local Bankss would offer sharply. However. because of their strong relationship with Disney and their repute as one of the top few syndicated loan Bankss in the universe. it was smart to offer sharply adequate to be shortlisted but non to be a clear first option. We besides agree with their determination to revise its determination and to offer to win after seeing the betterment in liquidness in local syndicated loans market and the increased support from the HK Government. The hazards for the loan were clear. Like most syndicated loans. there was subventioning hazard and recognition hazard. Underwriting hazard is the hazard that the market would non to the full buy the loan from the investment banker. While recognition hazard was the hazard that Disney would non be able to serve the debt.
Furthermore there was collateral hazard in that their disengagement collateral ( Disney’s principal plus ) was oceanfront land that would non be built for near to 2 old ages. On top of that. there was the long-run adulthood hazard of the loan. It was a 15-year loan where refunds started every bit tardily as twelvemonth 3. in comparing to most loans in emerging markets being between 3 and 5 old ages. Finally. there was the fact that Disney was be aftering to utilize operating hard currency flow for enlargement. which ever heightens recognition hazard. On the other side. the wagess were clear for Chase. Apart from the obvious underwriting fees. shutting fees and involvement payments. Chase would profit mostly from being involved in such a large syndicated loan in the Asiatic Markets. This is due to the fact that they were non presently one of the bigger participants in the emerging Asiatic Market and this would assist them raise their profile in the part and in add-on develop strong relationships with the HK authorities and local concerns.
We would urge Disney to subscribe Chase’s standard committedness missive after negociating on the inside informations of the criterion clause. As the largest syndicated loans supplier in the United States. Chase was a leader in this country around the universe and its experience could assist Disney win in this funding undertaking. In this peculiar trade. it was good to Disney as Chase was willing to supply the maximal flexibleness based on Disney’s proposal. For illustration. Chase offered to to the full subvention the loan on a 15-year footing and allowed Disney’s hard currency flow expenditures on its future enlargement. On the other manus. given the volatility in Asiatic banking market during that period. both the hazard that Disney could acquire a loan. and the cost of the loan would increase as clip base on ballss.
However. there are still some parts of the committedness missive that Disney should take notice on. From Disney’s facet of position. the market flex clause might give Chase excessively much power to modify the syndication after they signed the committedness missive. Even though. Chase stated they had ne’er applied the clause in Asia. they were non guaranteed to non use it subsequently. Furthermore. Chase was the innovator in the usage of market flex. so they could take advantage of utilizing it to profit them. In order to forestall this occurrence. Disney should negociate with Chase to make an understanding that limits the extent of the market flex clause. For case. in certain compact. Disney could restrict flex in pricing up to 10 footing points. and non allow any flex on sum of the syndication. because it would hold a immense impact on the whole undertaking. Additionally. Disney should do certain that for some cardinal construction. and footings. Chase would come to an understanding alternatively of audience with Disney before any alteration.
Based on Exhibit 8. Exhibit 9 and Exhibit 10. our group would urge the first scheme. which suggested that Chase be the exclusive authorization and processes the syndication with subunderwriting. This scheme was a procedure of two-stage syndication with 4 grades ( Organizing Arranger. Lead organizer. Arranger. Co-Arranger. and Lead Manager ) . Although this scheme would do Chase portion the syndication fees with other Bankss. it greatly reduced its syndication hazard and recognition hazard compared to a general syndication without sub-writing. For case. under scheme 2. the general exposure in the syndication of Chase would be $ 3. 3 billion as there were no sub-underwriters. However. under scheme 1. this exposure to Chase would be merely $ 660 million. as the hazard would be shared among 5 other sub-underwriters. In order to better exemplify our recommendation of scheme 1. below is a tabular array illustrates the different committedness fees and table exposures among the three strategies1:
From the tabular array above we could see that scheme one produced a commitment fee of $ 13. 85 million while scheme two produced merely $ 8. 78 million. In footings of the nationality and figure king of beasts of Bankss. under scheme 1 the entire figure of Bankss was 15. which was 3 less Bankss compared to the scheme 2 and even lesser than scheme 3. This to some grade helped Chase salvage on the fees. In add-on. by treating through the two-stage sub-writing syndication. Chase could carry through ddition. Disney’s
Disney’s penchants of holding the local Bankss involved. By aiming at local Bankss at subunderwriter degree. the syndication could convey more governmental support and be smoother. Therefore. scheme one is a better option in the consideration of fees. recognition hazard. syndication hazard. nationality and figure of Bankss.
Stefano Gatti. Undertaking Finance in Theory and Practice. Page 371. Table C3-3
There are three chief grounds why Disney awarded Chase the exclusive authorization. First of all. Chase had agreed to subvention the full sum of the trade. which means it would supply full sum on pricing and term. In this manner. Disney would hold to cover with merely one bank alternatively of with several Bankss. which greatly reduced its attempts in negociating among different parties and simplifies the disposal procedure. At the same clip. the underwritten trades could assist Disney acquire funding rapidly. Second. Chase offered maximal flexibleness to Disney. For illustration. in most instances. bank loans were to the full repayable within three to five old ages ; nevertheless. Chase was willing to offer Disney the 15-year adulthood nonrecourse loan. Besides. Chase accepted Disney’s oceanfront land that would be available in two old ages as the disengagement collateral. What’s more. Chase permitted Disney to utilize operating hard currency flows for its hereafter enlargements without any onerous compacts. Finally. Chase had earned its repute in the industry as a leader in the field of syndicated finance. increasing the potency of a successful syndication procedure. Based on the grounds we listed supra. we think that Disney made a good determination in taking Chase as a exclusive authorization.
Stefano Gatti. Undertaking Finance in Theory and Practice: Design.
Structuring. and Financing Private and Public Projects.