Executive SummaryIn late 1999, the Walt Disney Co. and the Hong Kong government agreed to develop Hong Kong Disneyland, a theme park and resort complex planned to open in late 2005. In order to finance the construction and working capital of the project, the selected underwriter, Chase Manhattan Bank, needed to raise HK$3.3 billion of non-recourse bank loans. The key challenges facing Chase were whether to bid at all, how to bid and how to structure the syndication that both meets the borrower’s needs and its own profit objectives. In order to assess the deal, we will start from the first round bidding then focus in depth on the three syndication strategies Chase proposed.

1. First Round Bidding

When Chase first heard about the Hong Kong Disneyland project, they were not very inclined to bid on it and be part of it, the deal was not that attractive to them. For this reason, they felt there were “three ways to approach this deal: 1) bid to win, 2) bid to lose and 3) no bid. Chase chose to bid to lose on the first round, but just enough to make it to the short list. Also, since Chase is one of Disney's relationship bank, Chase would not want to ruin this relationship by not bidding on their project,

If Chase wanted to lead the competition from the first round, they should have made a bid that was more aggressive and aimed to win. This bid would have been closer to the desires of Disney, making them more appealing and increasing their probabilities of leading the financing. However, they chose to bid to lose, with just enough terms to get into the second round to "protect their reputation", but not to lead. The deal started to become more attractive with the possibility of Disney awarding a sole lead arranger mandate and with the increased potential for a successful syndication. At this point, after Chase made it through the first round, they decided on a more aggressive final proposal where they would be very close to meeting most of Disney’s demands in order to win the deal.

2. Standard Commitment Letter The standard commitment letter established by Chase for the Disneyland project would have the following terms:- HK$300 million loan.- 15-year maturity.- A provision that allowed repayments to start as late as three years after opening.- Chase would underwrite the full amount.- Underwriting fee between 100 bp and 150 bp- Pricing: Initial spread of 100 bp over HIBOR, stepping up to 125 bp in year six and to 137.5 bp in years 11 to 15.- Allow Disney to use operating cash flow for expansion (capital expenditures).- Includes covenants requiring minimum debt service coverage ratios.- Standard "Market flex provision" clause: "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".

From Disney's standpoint, they should sign the commitment letter. Chase has had maximum flexibility with the desires of Disney. Chase has probably allowed terms that other banks would not have been so easy to accept, which might be because of the strong relationship between the bank and Disney. The only clause that might concern Disney is the "Market flex provision". However, given how flexible Chase is being with most of the terms, it is only reasonable that they protect themselves from some of the risks involving the Hong Kong Dollar fluctuations. It is as Chandiramani, of the Chase deal team, argued: "Things can change between the time you sign a deal and the time you try close it".On the other hand, from Chase's point of view, they should not alter any more of the covenants of the commitment letter. They have already been flexible enough with Disney in giving them most of their demands. However, they should be stricter regarding the repayments, since they are allowing them to start paying up to three years after opening. They should include a clause that states minimum payments as soon as the park starts running, even if they increase later to accommodate to a possibility of initial low demand. They could establish payments as a percentage of revenues or profit margin (with a minimum quantity that serves as a low boundary for payments). Then, as the park's revenues become more stable they might establish a fixed amount (maybe after 3 years -- the period in which they were supposed to start repayment). This would ensure the bank some cash flow from the beginning instead of waiting for three years after the project's completion.

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3. Three Syndication Strategies

3.1 The First StrategyThis strategy involves 4 tiers, 15 banks. Sole Mandate with sub-underwriting would give Chase the title of lead arranger. To protect itself from the full $3.3 billion they would in turn gather four other banks (Disney would prefer the other banks that were shortlisted in the bidding process). These four banks would also be lead arrangers in title but they would have to consign $660 million each. The rest would be allocated amongst ten other banks at different tiers. So there would be 5 lead arrangers while Chase acts as the sole mandate with divisional rights to all fees, then four arrangers, four co-arrangers, and two lead managers. This would be at $300mil, $250mil, $150mil, and $100mil respectively. See Appendix 2(a) for detailed allocation and fees.

Sub-underwriting is process of wholesale and general syndication is the retail phase. First of all, Chase doesn’t have a lot exposure in Asian; this is a good opportunity for it to make a brand and build relationship with HK government and local business. So to take a sole mandated lead position is the best approach for Chase. Secondly, In order to avoid the underwriting risk and credit risk, chase decides to hold 10% of the loan, which is HK$300 million. Sub-underwriting allows Chase to reduce underwriting risk and expedite the syndication process. Sub-underwriting would separate Chase from other banks who unwilling to underwrite the deal and increase the probability of winning a sole lead mandate.

The bank Chase should invite one or two local banks as arranger because they have less currency risk so they are more willing to underwrite the deal. They will support the project on the local banking market level. With local bank on the map the project would receive more approval from the government side. The bank to be considered can be HSBC, ABN or ANZ, etc.

Syndication enables Chase and other lead arranger meet the demand for the loan amount without having to bear the market and credit risk alone. For Syndication, chase has to decide the lowest amount of fees that could attract the required level of commitment. Chase forgoes HK$11 millions of fees to reduce the exposure by HK$1800million.

3.2 The Second StrategyThe second strategy for Chase, as a joint mandate, is inviting two other banks to share the underwriting commitment but skip the sub-underwriting phase. This strategy splits the underwriter amount as well as underwriting fees three ways and thus, decreases the underwriting risk. No sub-writing fee means that the banks can skip the wholesale phase of syndication. This will decrease the total cost which means that incase of an unsuccessful syndication Chase would not have to deal with credit exposure and credit risk.

Joint Mandate strategy has 4 tires and 18 banks involved. Chase and the other 2 banks will have $300 million each as syndication size. See Appendix 2 (b) for detailed allocation of the funds. Joint mandate can result into higher efficiency with each bank sharing the cost (52.21% and 18.27% less than Strategy 1 and Strategy 3), and any risk involved with this strategy. Since Chase has not penetrated the Chinese market yet, it does not know the market well. So with this strategy Chase has the option to partner with one of the local Chinese banks that know the market better and thus decrease their overall risk. This will not only reduce the competition but will also make the deal more politically viable for politicians who are willing it back up the plan. Though, the risk involved is low compared to other strategies, this would also mean sharing the profit as well as league table status.

3.3 The Third StrategyThe third strategy for Chase, as the sole mandate, is to skip the step of sub-underwriting and directly start general syndication. Compared to the other two strategies, the general syndication strategy increases return while adds risks to Chase. Generally, without sub-writing, Chase retains more profitability from the deal; however, Chase also bears all the underwriting risk.

This strategy involves 4 tiers, 21 banks, and the largest syndication structure compared to the other two strategies. This Strategy keeps the syndication size for Chase at HK$300 million, 9.1% of the total amount. See detailed allocation in Appendix 2 (c) Besides, inviting a larger number of banks could improve the competitiveness of the deal, resulting to better execution and pricing. However, more banks involved may lead to higher administration costs and coordination issues. In addition, Chase would hold less controlling

power with more banks included in the deal.

This sole mandated without sub–underwriting strategy on one hand would improve the compensation for Chase. The total fees for Chase under the third strategy would reach HK$23.36 million, 69% and 166% higher than strategy 1 and strategy 2, respectively. However, the strategy may also significantly expose Chase to underwriting risk, as Chase is the only underwriter of the deal and would underwrite the whole amount, HK$3.3 billion. If the market would not buy the deal from Chase, Chase would face significant

loss. Although this strategy generates the most compensation, the total fees earned only accounts 0.71% of the total exposure.

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3.4 The Optimal Syndication StrategySyndication is generally preferred when loan size is large and borrowers have strong operational and financial track record. Disney is a new face to the HK market and plus the Euro Disney has gone through some problems. General syndication might not be the best strategy to follow.

Given the above analysis, we recommend Chase launch a sub-underwriting deal, with 3 participating tiers (95 bp for sub-underwriters, 70 bp for Arrangers, 60 bp for Co-Arrangers and 50bp for Lead Managers). As for the nationality of the banks involved, we also recommend Chase to include Hong Kong local banks, which would bring more political support for the deal and send stronger confidence to foreign and smaller local banks about the deal quality. We believe that such structure would both meet clients’ requirements and reduce Chase’s risk exposures while secure its profits objectives at the same time.

4. Basle 2 and Commercial BanksInfluenced by the Basle 2 accords, Commercial banks have become more sensitive about holding assets on their balance sheets.First of all, the Basle 2 accords require commercial banks to apply standardizes rating approach. The new standardize rating approach is risk weighting. Therefore, holding riskier asset will directly affect the potential ratings of commercial banks.

Second, holding riskier assets will adversely influence the capital adequacy ratio. Under the Basle 2 accords, the new risk-weightings for assets clarify specific weight for different types of lending. A risk sensitive capital requirements rule induces banks to switch from high to low risk levels when the asset value falls below the level at which the bank does not satisfy the minimum capital level implied by a high risk asset portfolio.

Third, commercial banks may have to pay more attention to operating risk assessment when holding new assets. Operational risk is a new category or risk subject to capital requirements. All three methods, basic indicator approach, standardized approach and advanced measurement approach, for calculating a bank’s capital requirements for operational risk link the coverage for operational risk to the bank’s gross income. Therefore, if the bank holds low quality assets that cannot generate enough revenue, the bank may fail to meet the Basle 2 accords requirement.

5. Sub-debt in Large ProjectsIn 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 40% equity and also 43.3% subordinated debt provided by the government1. Subordinate debt, as an unsecured debt, is issued simply on the good name of the borrower and faith that the future cash flows will be adequate to pay off bondholders. It is given lower priority in preference to a senior debt claim on the same asset. In a bankruptcy, for instance, a subordinate creditor receives his money only after a senior debt is paid. Therefore, subordinated debts have a higher rate of return because of the inherent risk.

In this case, subordinated debt had some advantages for both HKTP and Chase. The first advantage subordinated debt shares with all kinds of business debt: more funding power. The more businesses borrow, the more easily the business can invest in Disney projects and expansion, fueling greater growth and more stock value. Additionally, subordinated debt is less expensive than alternatives such as equity. And it enhances return on equity and avoids dilution. To the lenders, they can earn higher interest from sub-debt. With senior debt, they tend to be less cautious when loaning. The debt is typically secured even through a business asset or through a government subsidy program, allowing lenders to give out business loans more recklessly. But with subordinated debt, lenders do not have this backing and must depend on business solvency to manage risk. This makes lenders more thoughtful when planning their loaning strategies and leads to better decisions in the market.

Additionally, issuing subordinated debt is also a positive signal from a company and shows confidence in the success of a project2.

1http://www.123helpme.com/disneyland-hong-kong-view.asp?id=164639 2 Read more: http://www.ehow.com/about_6460174_typical-subordinated-debt.html#ixzz2gFEIDYya

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6. Disney’s Ambitions in AsiaAfter years of disappointing results, the government-backed Disney Magic Kingdom project in Hong Kong is finally making money. Kam, managing director of Hong Kong Disneyland, announced that the theme park owned by Walt Disney (DIS) and the Hong Kong government was in the back, earning 109 million Hong Kong dollars ($14 million) during the fiscal year ending September, 2012. That was the first profit since Hong Kong Disneyland opened in 2005 and was also the result of growing number of tourists visiting Hong Kong.

In 2012, Hong Kong received a record-high of 48.6 million visitors from around the world; a remarkable increase of 16.0% over 2011, according to the Hong Kong Tourism Commission. The table below summarizes Hong Kong's tourism performance in 2011 and 2012

2012 Vs. 2011

Total visitor arrivals 48 615 113 +16.0%

- Overnight arrivals 23 770 195 +6.5%

- Same-day arrivals 24 844 918 +26.7%

Average hotel occupancy rate 89% No change

Average achieved hotel room rate HK$1,489 +9.8%

Average length of stay of overnight visitors 3.5 nights -0.1 night

Overnight visitor per capita spending HK$7,818 +4.7%

Total Tourism Expenditure Associated to Inbound Tourism HK$296.6 billion +14.6%

Source: Hong Kong Tourism Board

Of the 48.6 million visitors, 71.8% came from Mainland China. In 2012, Mainland China continued to be our largest visitor source market with 34.9 million arrivals (+24.2%), accounting for 71.8% of our total arrivals. This proportion was just 40% in 2002. Amongst all Mainland arrivals, 19.8 million (56.7%) were same-day visitors, up by 36.6% year-on-year. 23.1 million (66.3%) Mainland visitors came to Hong Kong under the Individual Visit Scheme (IVS), up by 26.2% over 2011. In 2011, the shopping expenditures of mainlanders were HK$110.8 billion (27.3% of Hong Kong’s total retail sales). That is almost 6% of the city’s GDP. Mainland tourists to Hong Kong are also big spenders, according to the report, spending an average of HK$8,200 each, 30% more than visitors from other countries.3

In other word, we may infer that Hong Kong Disney relies heavily on the tourists from Mainland China. On the other hand, the Disneyland was also a boost of Hong Kong tourism. Over 70% tourists from Mainland China listed Disney as an important attraction of the trip in Hong Kong.4

However, the newly announced Disneyland in Shanghai would be a great challenge to Hong Kong Disney. The new Disneyland in Shanghai will distract many visitors from Hong Kong Disney. Despite the fact that more than a third of Hong Kong Disneyland’s visitors come from China – about 1.6 million each year – the theme park just ended its six-year deficits. And now Shanghai enters into the picture. Shanghai’s Disneyland will be six times bigger compared to the current size of Hong Kong Disneyland, which only offers 16 attractions.

3 http://www.tourism.gov.hk/english/statistics/statistics_perform.html4 Tourism Commission - Tourism Performance - Tourism.gov.hk

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Fortunately, Hong Kong can still race against time and make necessary improvements before Disney Shanghai opens in 2014. A HK$3.6 billion (US$465 million) expansion project is due to begin at the end of the year and will finish by the time Shanghai Disneyland opens its door to the public. However, with Universal Studios in Singapore set to open early in 2010, Hong Kong Disneyland has to deal with competition long before Shanghai’s Disneyland opens, especially since the target demographic is the same. With Singapore’s close proximity to Indonesia and Malaysia, a significant chunk of its intended visitors may end up not visiting Disneyland at all, even when they are in Hong Kong.However, we have reasons to believe that Walt Disney Company must have studied the matter of the impact on Hong Kong Disneyland carefully before taking that giant step into China. And Disney Corporation believes that as a county with an amazing population of over 1.3 billion, China is still an incomparably huge market that can afford two Disneyland.

APPENDIX 1

Appendix 1

ASSUMPTIONS ON FEE CALCULATIONS - CHASE'S POINT OF VIEW

UNDERWRITING FEE 1.250%

SUB-UNDERWRITING FEE 0.250%

TOP TIER CLOSING FEES 0.700%

CHASE'S FINAL HOLD POSITION OF $HK 300 MILLION

# 1 - EXHIBIT

8a

# 2 - EXHIBIT

8b

# 3 - EXHIBIT

8cCHASE FEES IN $US (MILLION's) $1.776 $1.126 $2.955CHASE'S MAXIMUM EXPOSURE $HK (MILLIONS) HK$3,3

00 HK$1,1

00 HK$3,3

00

CHASE'S EXPOSURE IN THE GENERAL SYNDICATION

$HK - MILLIONS HK$66

0 HK$1,1

00 HK$3,3

00

$US - MILLION7.76470588

2 $85 141 423

CHASE'S FEES DIVIDED BY GENERAL SYNDICATION EXPOSURE

2.0894

%0.7986% 0.7080%

NO. OF BANKS NEEDED TO CONTROL 60% 7 8 10

5

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Appendix 2

Assumptions on fee calculationLoan Amount (HK$ million)= 3,300.00

$HK/$US Exchange Rate= 7.8

Underwriting Fee= 1.25%

Total underwriting Fees ($HK millions)= 41.25

Sub-Underwriting Fee= 0.25% Mandate= Sole

Top-Tier (Arranger) Fee= 0.70% Sub-Underwriting= Yes

Appendix 2(a)Strategy 1 Sole-mandated with sub-underwriting

Fund Allocation (HK$MM)

Initial UnderwritingSub

Underwriting General Syndication

Tiers #Commitment

AmountTotal Allocation

Invitation Amount

TotalPercent Scaled Back

Final Allocation

Total Allocation

Allocation per Bank

Chase 1 3,300.00 3,300.00 660.00 660.00 54.50% $300.00 300.00 38.46Lead Arranger 4 2,640.00 2,640.00 54.50% $300.00 1,200.00 153.85

Arranger 4 250.00 1,000.00 0.00% $250.00 1,000.00 128.21Co-Arranger 4 150.00 600.00 0.00% $150.00 600.00 76.92

Lead Managers 2 100.00 200.00 0.00% $100.00 200.00 25.64Sum 15 3,300.00 3,300.00 5,100.00 3,300.00

Fee Allocation

Per Bank Income (HK$000) Total Per Bank Total for all Banks

Underwriting

FeeClosing Fee

Underwriter Spread

Sub-U/W Spread

Closing Fee

IncomePool Income HK$ (US$000) HK$000 (US$000)

Chase 0.30% 0.70% 9,900 1,650.00 2,100.00 200.00 13,850.00 1,775.64 13,850.00 1,775.64Lead Arranger 0.25% 0.70% 1,650.00 2,100.00 200.00 3,950.00 506.41 15,800.00 2,025.64

Arranger 0.70% 1,750.00 1,750.00 224.36 7,000.00 897.44Co-Arranger 0.60% 900.00 900.00 115.38 3,600.00 461.54

Lead Managers 0.50% 500.00 500.00 64.10 1,000.00 128.21Sum 41,250.00 5,288.46

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Appendix 2(b)Strategy 2 Joint-mandated without sub-underwriting

Assumptions on fee calculationLoan Amount (HK$ million) 3300 Mandate Joint

Underwriting Fee 0.0125 Sub-Underwriting NoSub-Underwriting

Fee 0.0025$HK/$US Exahgne

Rate 7.8Top-Tier

(Arranger) Fee 0.007Total underwriting

Fees ($HK millions) 41.25Fund Allocation (HK$MM)

Initial UnderwritingSub

Underwriting General Syndication

#

Commitment Amount

Total AllocationInvitation amount

Total commitment

Percent scaled back

Final allocation (HK$MM)

Total Allocation (HK$MM)

Allocation per Bank

Chase 1 1,100 1,100.00 300 300 300 300 38.46

# Other banks 2 1100 2200 300.00 600.00 - 300.00 600.00 38.46Lead Arranger 0 - - - - -Arranger 4 250.00 1,000.00 - 250.00 1,000.00 128.21Co-Arranger 6 150.00 900.00 - 150.00 900.00 115.38Lead Manager 5 100.00 500.00 - 100.00 500.00 64.10

Sum 18 3,300.00 3,300.00 3,300.00

Fee Allocation Per Bank Income (HK$000) Total Per Bank Total for all Banks

Underwriting Fee

Closing FeesUnderwriter

SpreadSub-U/W Spread

Closing Fee

IncomePool Income (HK$M) (US$) (HK$) (US$)

Chase 0.55% 0.70% 6,050.00 2,100.00 633.33 8,783.33 1,126.07 8,783.33 732.912 other

mandated Banks 0.55% 0.70% 6,050.00 2,100.00 633.33 8,783.33 1,126.07 17,566.67 1,042.74Lead Arrangers (sub UW) - - - - - - $-Arranger 0.70% 1,750.00 1,750.00 224.36 7,000.00 2,333.33Co-Arrangers 0.60% 900.00 900.00 115.38 5,400.00 1,800.00Lead Managers 0.50% 500.00 500.00 64.10 2,500.00 833.33

41,250.00

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POOL INCOME FOR STRATEGY 2

Final

Allocation Per bank Total

Total closing

fee income

0.70% 3,300 23,100

Payable # Of banks Chase 1 0.70% 300 2,100 2,100 Other

mandated 2 0.70% 300 2,100 4,200

Lead Arranger 4 0.70% 250 1,750 7,000

co 6 0.60% 150 900 5,400 Managers; 5 0.50% 100 500 2,500

21,200

Pool

income 1,900

Appendix 2(c)

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Strategy 3 Sole-mandated without sub-underwriting

Assumptions on fee calculationLoan Amount (HK$ million) 3300 Mandate Joint

Underwriting Fee 0.0125 Sub-Underwriting NoSub-Underwriting

Fee 0$HK/$US Exahgne

Rate 7.8Top-Tier

(Arranger) Fee 0.007Total underwriting

Fees ($HK millions) 41.25Fund Allocation (HK$MM)

Initial UnderwritingSub

Underwriting General Syndication

#

Commitment Amount

Total AllocationInvitation amount

Total commitment

Percent scaled back

Final allocation (HK$MM)

Total Allocation (HK$MM)

Allocation per Bank

Chase 1 3,300.00 3,300.00 300 300 300 300 38.46# Other banks 0

Lead Arranger 0 - - - - -Arranger 4 250.00 1,000.00 - 250.00 1,000.00 128.21Co-Arranger 8 150.00 1,200.00 - 150.00 1,200.00 153.85Lead Manager 8 100.00 800.00 - 100.00 800.00 102.56Sum 21 3,300.00 3,300.00 423.08

Fee Allocation

Per Bank Income (HK$000) Total Per Bank Total for all Banks

Underwriting Fee

Closing FeesUnderwriter

SpreadSub-U/W Spread

Closing Fee

IncomePool Income (HK$M) (US$) (HK$) (US$)

Chase 0.55% 0.70% 18,150.00 2,100.00 2,800.00 23,050.00 2,955.13 23,050.00 732.91# Other mandated Banks (2) - -

Lead Arrangers (sub UW) - - - - -

Arranger 0.70% 1,750.00 1,750.00 224.36 7,000.00 2,333.33Co-Arrangers 0.60% 900.00 900.00 115.38 7,200.00 1,800.00Lead Managers 0.50% 500.00 500.00 64.10 4,000.00 833.33

41,250.00

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POOL INCOME FOR STRATEGY 3 Final Per bank Total

Total closing

fee income

0.70% 3,300 23,100

Payable # Of banks Chase 1 0.70% 300 2,100 2,100 Other

mandated - - -

Lead - - - Arranger 4 0.70% 250 1,750 7,000

co 8 0.60% 150 900 7,200 Managers; 8 0.50% 100 500 4,000

20,300

Pool

income 2,800

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