Accepting a lesser underwriting fee (could have been lesser than EBPP) Q: As Disney would you sign the standard commitment letter? Which parts might concern you and why? As Chase, which parts are you willing to alter or remove? If we were in Disney’s position, we would have signed the standard commitment letter. Chase has made the proposal to suit most of our needs. We have a strong relationship with Chase Manhattan Bank worldwide. As Disney the following aspects of the proposal would be of concern: 1 .
The Market Flex Clause stating: “Chase shall be entitled, after consultation with Disney and the Borrower, to change the structure, terms, amount, or pricing of the Facility if the syndication has not been completed due to a change in the Hong Kong Dollar market and if Chase determines, after consultation with Disney and the Borrower, that such changes are advisable to ensure a successful syndication of the Facility” However, we understand that Chase is only trying to minimize its risks against the Hong Kong Dollar fluctuations which are reasonable concerns.
We are considerate towards them being so flexible and adaptive to our requirements. We also appreciate their creative aspects in the proposal. As Chase, we would want to implement a strong repayment strategy as payments are made 3-years after opening. We would demand payments as soon as the theme park opens. We could establish payments as a percentage of revenues or profit margin to ensure cash flows from the opening day. We old also be concerned with the political risk in Hong Kong given the short time since handover to china.
The lack of tangible assets as collateral is concerning for bank financing. Finally, the unusually long time horizon of the loan is also risky. Q: What syndication strategy would you recommend for the loan? Think in terms Of the number Of tiers, commitments and fees for each tier, nationality and number of banks, final hold positions, subordinating vs.. General syndication, etc. There are different 3 strategies which has different structural profiles and complications. Each of them varies role of Chase as an arranger f syndicated loans.
It was quite good time for loan syndication as there were good indications of market recovery and tightening of credit spreads which meant higher liquidity on the market. Chase would include other underwriters to reduce exposure risk and these underwriters would be confident in success of a deal due to favorable economic conditions and solid reputation of Chase bank as a lead international underwriter. What’s more there is another argument in favor of success – HOOK government agreed to provide subordinated loan of HAKE 6. Ban which is almost twice the size of syndicated loan provided by the banks. Talking about potential threats – there is a case of Disneyland in Europe where the deal didn’t go smoothly at all and also maturity of loan -? 15 years. Comparing it with average 3-5 years, it is possible to deduce that there are some long term risks, which are definitely undesirable for Chase. Also overall amount of loan is USED 423 million which is almost 3 times more than average syndicated loan issued by Chase in that year(1 999). O in the first strategy Chase would be single mandate arranger with 4 banks to act as sub-underwriters and lead arrangers (therefore getting higher fees) n exchange for HAKE MM commitment each. After that they will allocate it to 4 arrangers, 4 co-arrangers and 2 lead managers totaling number of banks as 15. Final allocations are as follows – Chase will arrange HAKE MM to itself. The same amount will be allocated to each of 4 lead arrangers (1 200 overall) and HAKE MM to each of 4 arrangers(1000 overall), HAKE MM to each of 4 co-arrangers(600) and HAKE MM to each of 2 lead managers(200).
Strategy works really well due to simplicity and the fact that Disney has to deal only with one lead bank, which will reduce its underwriting risks by syndicating the loan. Second strategy is less beneficial for Chase -? sharing mandate with 2 other banks and having joint underwriting commitment, which will mean less risks and also less returns and losing 2/3 of its fees(instead of being a main underwriter). However, except reducing risk, this decision has 2 other positive aspects. First, it satisfies Disney shareholder’s desire to have 3 underwriters.
Second, there will be much less sub-underwriting. Each of lead underwriters would split HAKE 3. 3 billion by arranging HAKE 1. 1 billion for each and passing it to 4 arrangers(HAKE 250 million each), 6 co-arrangers (HAKE 150 million each) ND 5 lead managers (HAKE 100 million each) leaving HAKE 300 million of loan commitment for each of 3 lead arrangers including Chase. Number of banks in deal – 18. Third strategy has advantages of first two. Chase will be sole mandate holder with no joint arrangers and there will be no sub- underwriting.
However Chase will carry more underwriting risk by allocating loan to 4 arrangers (HAKE MM each), 8 co-arrangers (HAKE MM each) and 8 lead managers (HAKE MM each). Number of banks in deal – 21 . Recommending potential strategy (out of these 3) we need to consider both internal (risk and fees) and external (ranking, name, status, economy). Chase is well known player on global market – it is in top 2 of top arrangers globally in 1 999 but it is not even in top 10 in Asian rankings for the same year.
This might mean that Chase has much lower presence in Asia and needs to improve its reputation as a top arranger. That could be essential because of recovery of Asia market and improved liquidity which will mean more opportunities for future. So in our personal opinion it needs to do everything to receive mandate solely posing itself as a competitor of HASH, BAN Omar etc. So it means that 2nd strategy will not contribute to strategic advantage because mandate needs to be shared with other top arrangers.
Choosing between 1st and 3rd it is important to mention risk factor, but at the same time fees and returns will be affected much less. In our opinion 3rd option might be too risky by skipping sub-underwriting face and causing additional effort to promote a syndicated loan to 20 other banks by Chase alone. Taking into account significance of its deal – it is more efficient to make it simpler, with sub-underwriting and less parties involved. This will minimize credit and uncertainty risk. The best solution for Chase is to choose the first strategy. Chase will arrange HAKE MM to itself.
