Chase’s Strategy for Loan Syndication
M. Herack-520022 K.M. Haikal-822923 R.Wijaya-659459 S.Stoyanov-446714
Project Background Project Agreement: Hong Kong Government (HKG) and Disney agree to build a HK$ 14 billion Disney theme park & resort located at NE side of Lantau Island, Hong Kong
Project Phase Project Phase I: Disney style theme park & resort complex; 1 or 2 hotels; and a dining and entertainment complex Phase II & III: Covered possible options for developing adjoining sites to the proposed Disney theme park & resort in the future (not entirely clear) SPV: HKTP (company owned jointly by Disney – 43% and HKG – 57%) established to construct, own and operate the theme park
Construction Costs for HK$ 14 Billion HK Disneyland Project Sources of financing the HKTP Project: The Hong Kong Government (HKG) would provide HK$ 3,25 billion Disney would provide HK$ 2,45 billion HKG would provide subordinated loan worth HK$ 6,1 billion HKG & Disney would raise HK$ 3,3 billion through external means i.e. through Chase Manhattan Bank (HK office)
Chase Manhattan Bank’s (Chase) Role in Making a Winning Bid Out of 17 banks, Chase was awarded lead arranger of the HK$ 3,3 billion bank financing for the construction of the Disney HK theme park & resort complex Chase’s HK office tasked with executing the mandate by 2002 when the funds would be needed Chase’s strategy for making a winning bid:
1. 2. 3. 4. 5. 6. 7.
“Bid to lose” by bidding aggressively but on terms that would meet Chase’s target earnings
Demonstrated flexibility on key strategic terms of the deal Had strong credentials for these types of syndicated transactions Had knowledge & good relationship with the Hong Kong/Asian Market Agreed by firm commitment to underwrite the full HK$ 3,3 billion Loan priced properly against recent similar transactions Offered a deal which was dynamic and contained creative features
Chase’s Syndication Options Option
Chase’s Role
I The Coordinating Arranger of
Advantages for Chase
Chase is sole Lead
coordinating lead arrangers where each jointly underwrites HK$ 1,1 billion No sub-underwriting
Arrangers/Coordinating Arranger & underwrites the full HK$ 3,3 billion No sub-underwriting or joint underwriting
Chase-HK$ 300 billion Lead arrangers-HK$ 300 million/each Four arrangers-HK$ 250 million/each Four co-arrangers-HK$ 150 million/each Two lead managers-HK$ 100 million/each
Three coordinating arrangers-HK$
Chase-HK$ 250 million Four arrangers-HK$ 250 million
Sub-underwriting the loan reduces
Only two additional underwriting commitments required unlike option I
Sole lead arranger of the mandate and therefore no sharing of underwriting fees
Option II will require Chase to colead the mandate with two other banks & share underwriting fees
Exposed to greater underwriting risk Larger syndication due to the number of participating banks
HK$ 3,3 billion Four banks are lead arrangers i.e. sub-underwriters of HK$ 660 billion
Chase’s exposure to risk of
Disadvantages for Chase
III
Chase & two other banks are
Syndication Allocation
II
300 million/each Four arrangers- HK$ 250 million/each Six co-arrangers-HK$150 million/each Five lead managers-HK$100 million/each
underwriting the loan from HK$ 3,3 billion to HK$ 660 million Easier to syndicate the loan due to sub-underwriting support Easier for HKTP/Disney to deal with one arranger
each Eight co-arrangers- HK$ 150
million each Eight lead management-HK$ 100
million each
Involved Risk (1/3) Credit issues:
1. 2. 3. 4.
Disney’s term sheet contained aggressive element (15 year maturity) Disney’s desire to use operating cash flows for expansion No willing to subordinate management fees and royalties No collateral other than site yet to be built Stress testing the financial implications, Chase decided these credit issues were adequately mitigated by the borrower’s conservative capital structure and the government’s commitment to project Result: chase resolved to show maximum flexibility by making its proposal as close as possible to Disney’s request. Include covenant requiring minimum debt service coverage ratios
Involved Risk (2/3) Underwrite issues: commitment to underwrite the full amount
1.
Although a fully underwritten deal exposed the bank greater risk , Team seek senior management approval 2. The proposal would show: Chase’s support for the client The confidence of the deal Provide the greater profit for the firm Increase the probability of winning a sole lead mandate Credit Exposure: Credit exposure, Chase wanted to hold on its books after g eneral syndication Differentiates between Underwriting Risk and Credit Risk As lead arranger, Chase general policy was to hold 10% of the loan (depend on loan size/risk increased) To signal its confidence in particular deal, Chase decided to hold a final position of HK$ 300 million, slightly less than 10%. • • • •
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Pricing
1.
Involved Risk (3/3)
Benchmarking the Proposed Deal against recent comparable transaction
Chase Proposal: Initial spread of 100 bp over HIBOR 125 bp 6th year 137,5 bp in years 11 to 15 •
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Term of Commitment Letter • •
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HK$ 300 million loan 15 years final maturity/provision that allowed to start as late as 3 years after opening but du e to the leery market in the 15 years tenor, most bank loans were fully repayable in 3 -5 year Chase would underwrite the full amount Underwriting fee between 100-150 bp Disney plane to use operating cash flows for expansion Avoid subordinate management fees and royalties Include covenants requiring minimum debt service coverage ratios Oceanfront land is a borrower’s principal asset Disney’s plane to use operating cash flows for expansion Chase propose initially the spread would be 100 bp over HIBOR, stepping up to 125 in six year, and to 137,5 bp in year 11 Step-up pricing Market flex provision clause
Term of Syndication Loan (1/2) Chase chose sub-underwriting strategy for HK$3.3 billion 1. 7 banks HK$ 600 million in return go lead arranger titles and subunderwriting fee of 25 bp 2. Merger with JP Morgan, six banks agree to participate at HK$ 600 million each and the exposure scale back to HK$471 million each, 3. General syndication lead to reduce with the amount of HK$ 300 the subunderwriters’ commitments •
Term of Syndication Loan (2/2) Chase invited 67 banks with three levels of participation: 1. Arranger tier for commitments of HK$ 250 million, up-front fee of 70bp; 2. Co-arranger tier for commitments go HK$ 150, up to fee of 60 bp 3. Lead manager tie, between HK$75 million and HK$100 million, fee 50 bp HK$2,3billion construction term loan and HK$ 1 billion revolving credit facility-to be received by 25 October It had to right to close the syndication early if it received sizable commitment quickly General syndicate HK$5.3 billion from 25 banks, considering the HK$4.2 billion in commitment from seven sub-underwriters, Chase had approved HK $9.5 billion – an over subscription of close to three times •
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Advantages & Disadvantages for Disney
Advantages
HK$ 2,444 of Equity HK$ 3,3 billion loan from Chase Bank to build Disney Land Hong Kong
Disadvantages
The Theme Park stages rely on Government’s policy and loan from both Hong Kong Government and Bank
Advantages & Disadvantages for Hong Kong Government
Advantages
HK$ 3,250 of equity 57 to 75% share of HKTP Generate employment (estimated for 18,000 people) Financial rate of return at least 6% to 25%
Disadvantages
HK$ 6,092 Loan for HKTP HK$ 14 billion COST for Land reclamation & infrastructure development.
Deal Outcome •
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Option I: Sub-underwriting was selected The deal was a major success – over subscribed up to HK$ 9.5 billion from 25 banks Breakdown of banks’ subscription:
- HK$ 4.2 billion subscribed by 7 Lead Arrangers/Sub-underwriters - HK$ 5.3 billion subscribed by 25 Arrangers
