1.

Chase should have bid for the loan mandate in such a way to maximize the investment fee income after controlling for risks involved, and the clients preferences for syndicated loan. Thus. Chase faced a trade off between Risks and rewards. We have to weigh out the risks with rewards as below Risks Involved Credit and Downgrade risk This arises from the level of exposure that Chase would take in the HK$3.3 billion loan. Usually they put a limit of 10%. Thus Chase had to bid in such a way to have greater co-operation from syndicating partners so as to reduce the resulting loan exposure by way of spreading the risk with other players Underwriting risk The risk that the issue may be undersubscribed leading to Chase taking up the balance loan amount. Thus Chase had to set proper price for the loan (spread) and to include more sub underwriters to share the burden in the event of under subscription Political Risks The risk that the Hong Kong government may back track on their promises and that they may pressure them to include local banks in the syndication Reputational risk In the event that they put a bid that is not fair to other participants, this would taint their standing in the project finance industry. Liquidity risk the higher the exposure to the loan, the higher their liquidity risk because the loan had a very loan tenure of 25 Years and that the project is being done in an emerging market where the level of players is not sufficient to match liquidity levels of developed markets Rewards A successful bid would put Chase firmly on top of the League on Project and Syndicate finance. It would also give them a first mover advantage into the growing emerging market The bid should maximize their underwriting fees and also add a quality loan asset in the portfolio of Chase. Thus they had to bid in such a way to maximize both underwriting fees (by optimizing number os partners) and interest income (by choosing the optimum spread... [continues]

In this case analysis I will first show the requirements the company had for its financing. Then I will provide an analysis of the main pros and cons for Chase in connection with the deal. Lastly I will show how both affected the pricing as well as the execution of the deal. In order to build the new Disneyland in Hong Kong a new non-recourse entity, Hong Kong International Theme Parks Ltd (HKITP) was formed. While the owners supported the project with substantial amounts of equity (Disney and Government) as well as with subordinated debt (Government), Disney had significant requirements for the financing portion of the remaining needed amount. Disney was looking to receive bank financing for this new entity of HKD 2.3bn as a Delay Draw Term Loan (DDTL) plus HKD 1.0bn working capital line (Revolving Credit Facility or RCL). While they had learned from their most recent experience with Disneyland in Paris not to have a too aggressive capital structure in place, they nevertheless demanded significant flexibility with regard to the following terms and conditions: - 15 year tenor - delayed amortization structure which would start as late as 3 years after the opening of the park, i.e. 8 years after closing of the loan and 6 years after funding of the loan - allowed CAPEX for further expansion (instead of using FCF for amortization) - full underwriting of the deal by up to 3 Lead Arrangers - no subordination of management and royalties - main collateral for the deal (land) would only become gradually available as the government first needed to reclaim the land Not only did Disney remain conservative with regard to the overall capital structure (see Exhibit 5 in case) but they also chose to access the markets in 2000 in order to ensure access to funds at attractive pricing despite having to pay commitment fees during the first two years when the DDTL was undrawn. From Chases perspective this prospective deal was interesting for the following reasons. First of all becoming a lead arranger for a syndicated credit facility always provides a revenue opportunity for the bank. Furthermore, the new entity had a solid capital structure with 40% equity and also 43.3% subordinated debt provided by the government. This meant that the new bank debt would be the most senior piece in and would only make up 16.7% of the capital structure. Thus, the credit risk for any credit commitment was not too high (at least when compared to other project finance deals). Another major factor was that one of the owners was the Hong Kong government and it was extremely committed to make this project a success. This commitment was shown in initial capital investments of HKD 14bn funded by the government to reclaim the land which the park should be built on. Additionally it provided equity and the subordinated loan to the capital structure. Overall this project was extremely important to the region since it would help to create thousands of jobs and spur the economy which was on a downturn for the two most recent years. This high profile support of the government as well as from Disney (sinc e they didnt want another problem child like Paris) further improved the quality of the overall deal. Additionally, as a global leader in the loan syndication

market as well as a project finance provider, Chase also recognized that the Asian loan market showed signs of recovery which should facilitate a possible syndication of such a transaction. In addition to the deal specific attractiveness, this deal also had broader implications for Chases franchise. Chase was a leader in the US syndicated loan market and had also a strong market position in Asia as well as in the project finance syndication. Given this deals visibility and size, it would help Chase to further manifest its leadership position and its long-term interest in this field. It would show their strengths in evaluating risk and their capabilities as a global leader with tremendous execution skills. Additionally, it would help them to further strengthen their existing relationship with Disney and possibly also to build a relationship with the government of Hong Kong. Both could result in additional business/revenue opportunities for Chase in the future. Nevertheless this deal contains also significant risks for Chase. First, given that Disney is asking for a fully underwritten deal, Chase would face underwriting risk. In case of an unsuccessful syndication Chase would run the risk that they have to hold more of the deal on their own balance sheet than initially anticipated. This then would lead to increased credit risk since they would have higher credit exposure to the company than planned (usually a Lead Arranger of a syndicated loan has final hold target of approximately 10%; in this case Chase set its target slightly below 10% due to the long tenor). Both of these issues are closely linked to the profitability of the deal for Chase. In case the syndication would not go as well as anticipated, Chase would be forced to pass on more of its upfront/underwriting fees to other syndicate members in order to attract their interest. This in turn would not only negatively impact Chases reputation as a leader in syndicated loans, but also reduce the profitability for Chase and thus might not warrant their work and implied risk in this deal. Therefore it was critical for Chase to judge the market appetite correctly for such a deal and to find a pricing and a structure that will be sufficient to attract interest in the deal. The following risks that were embedded in the deal needed to be adequately reflected in the pricing of the deal as well as in structural mitigants of the deal. First, the long tenor (15 years), the historical issues around Disneyland Paris, the delayed amortization feature, the allowed CAPEX as well as the lack of subordination for management fees needed to be addressed in an increased margin (with step-up feature) as well as in a significant upfront fee (different levels for each commitment tier). Additionally the company had to pay a commitment fee for the undrawn amount during the period until the draw down happened under the TL. Lastly, since the company asked for a fully underwritten deal, they had to pay a fee for the related underwriting risk. In order to find what the overall adequate pricing should be, Chase compared this deal to other deals that had been successfully syndicated. In order to determine the correct pricing the comparable deal was used as a basis (in this case the Hutchinson Telephone Corp deal was probably the closest comparable one) and based on deal features that are similar or different, the pricing for the new deal

would be derived. Structural mitigants could include the capital structure of the company itself, a debt service coverage ratio covenant as well as market flex for the underwriter which could provide pricing flexibility to the underwriter in case the market would not view the proposed pricing as interesting. Given these risks and opportunities, Chase had to make a decision how to bid for this deal. Initially they chose to bid to loose for the following reasons. First of all, they needed to bid since they didnt want to jeopardize their relationship with Disney and because as a leader in the syndicated loan market it was almost mandatory for them to be part of at least the bidding process of this important transaction. They had to find a middle ground between a structure that is not totally out of the market and one that is still profitable enough for Chase just in case they would win the bid. Once they made it to the second round Chase realized that the overall market conditions had further improved and that also the government had again reiterated their support for and the importance of the deal which should further boost the interest in the transactions. This made them change their strategy so that they were then trying to win the bid as a sole lead arranger. In order to do so, they had to show creativity (2 separate RCL tranches), market knowledge (pre-syndication sheet and attractive pricing) and flexibility (allowed CAPEX and seniority of management fees). Furthermore, they had to provide the company with the requested full underwriting (showed support and confidence in deal). Their strategy paid off and they won the deal as sole lead arranger. In order to now successfully execute the deal for the client while still maintaining profitability for Chase, they chose the following strategy. They chose to invite a group of sub-underwriters which decreased the underwriting and ultimately therefore also the credit risk for Chase. Additionally this also increased the overall syndication support as it showed to the broader bank group that more than one bank supported the deal. In order to get best execution for both, the DDTL and the RCL (lower Return on Asset since often undrawn), any commitments were requested on a pro rata basis so that none of the banks could cherry pick any of the facilities. This guaranteed that both facilities get the same demand. In cooperation with Disney it was decided to invite a group of 9 subunderwriters. This would provide sufficient probability to at least get 3-4 additional sub-underwriters in the deal. The group consisted of a mix of relationship banks as well as other local banks. Given a tremendous support they ended up getting 7 out of the 9 invited banks committing to the deal (5 relationship banks from Disney (see Appendix I & II), 1 bank that led the Disneyland Paris deal and 1 major local bank)1 which already led to an oversubscription of the deal (HKD 4.2bn vs HKD 3.3bn). This then in turn led to extraordinary success with the remaining syndicate. From additional 67 invited banks, 25 banks committed to the deal at various tiers and led to an overall oversubscription of 188% (see Appendix I). While this is good

from Chase perspective as it is a very successful transaction in the market, it probably also meant that the company has overpaid since the market viewed this deal as so attractive.