Chase's Strategy for Syndicating the Hong Kong Disneyland Loan

Economics for Finance Practice Case Study 1 - Questions

1. How should Chase have bid in the first round competition to lead the HK$3.3 billion Disneyland financing?

According to the case, there are three ways to bid: to win, to lose, and no bid. Although Disney was important global client, Chase would not consider the deal as attractive, which has long tenor. Also, with aggressive bidding from local banks, Chase decided to bid to lose. To protect the reputation, Chase would bid aggressively enough to make the short list for the high-profile deal. Besides, Chase agreed the deal would be much more attractive if Disney chose to award a sole lead arranger mandate. So they revise their proposal, towards winning the mandate. With other four banks, Chase was in the short-listed for the mandate.

2. 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?

As Disney side, we would sign the letter, since Chase has revised their proposal to meet most percentage of our requirement.  We may also consider the Market Flex, indicated in the case as: “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”. It is reasonable for Chase to minimize the fluctuation risk of hong kong dollar.

From the Chase side, we would build a more favorable repayment strategy, considering the previous payments, which are made 3-years after opening. We would require repayments once the theme park starts the business. We can set payments as a percentage of revenues or profit margin to ensure cash flows from the opening day.

3. 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, sub-underwriting vs. general syndication, etc.

The syndication strategy recommended for the loan would be the first strategy which is Chase with the Sole Mandate and Sub-Underwriting. This strategy is less risky compared to Strategy 3 as the underwriting is shared between the sub-underwriting banks but also make Chase to have a better position for Chase compared with Strategy 2 as the underwriting is shared between three lead mandates which makes Chase to have less negotiation power as they have to share the allocation with the other lead mandates, which in turn can reduce the amount of profit as it is mentioned in the case that the local banks such as Bank of China and Hong Kong Shanghai Banking Corporation are expected to bid aggressively.

Although there are more banks involved as the sub-underwriters and Chase will have to disclose more information compared to Strategy 2 and 3, Chase is the sole mandate so they have a stronger bargaining and negotiation power when dealing with sub-underwriters and could set terms that will benefit Chase better and could control and supervise the whole syndicate by themselves and will not be affected other lead mandates which they could not control. In terms of bank selection, Chase should focus on local banks which has expertise in the local market and other international banks that have experience in the Asian market. This will help Chase because even though they are one of the largst syndicated loan lenders in the market, they are not in the top arrangers of Asian Project Finance Loans as mentioned in Exhibit 6c. Furthermore, Chase is a US bank, so they are somewhat exposed to currency exchange risk and bringing in local bank will reduce the exposure of currency risk. As mentioned in the case, the involvement of local banks might receive greater political support from the Hong Kong government and also send a strong signal to other banks of the quality of the deal.