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We are investment bankers, not commercial bankers, which means that we underwrite to distribute, not to put a loan on our balance sheet. Matt Harris, MD, Chase Securities
Project Appraisal and Finance Group 14 | Section A Ankit | Inderpreet | Indu | Khalid | Mohit
Decide:
Banks to invite Allocation of fees and titles Loan to retain on B/S
Recession:
Thai currency crisis 1997 Unemployment rate more than doubled GDP fell for the first time in 20 years Stock market crashed Tentative recovery by mid-1999 Decline in o/p remained a subject of public concern
People on HK banking on a Disney theme park to create more jobs and end a slump in tourism
Business Segments: 1. Theme Parks and Resorts 2. Media Networks 3. Studio Entertainment 4. Consumer Products 5. Internet/Direct Marketing 7 Theme parks (+4 in the works), 27 hotels with 36,888 rooms, 2 cruise ships, 728 Disney stores, 1 broadcast n/w, 10 TV stations, 9 international Disney channels, 42 radio stations, 1 internet portal, 5 major internet websites, interests in 9 US cable networks, and a library containing thousands of animated and live films and TV episodes.
Importance of international growth: US gives 80% of its revenues, has only 5% of world population
Development strategy:
Learning from our experience with Disneyland Paris [a deal that experienced financial problems shortly after opening], the strategy for Hong Kong was to start small and then to add capacity over time as demand grew. In fact, Phase I included plans to double capacity within the first ten years of operations. The real keys to success are having the land available for growth and the ability to finance this growth out of operating cash flow.
This sum does not include an additional $14 billion of land value and associated infrastructure development contributed by the HK Govt.
Developed a Term Sheet for bank financing and contacted company s relationship banks and other banks expert in HK syndicated loan market Discussions: Get preliminary expression of interest and assessment of current conditions in HK bank market Disney explained: wanted to raise HK$3.3 bn non-recourse loan package on a fully underwritten basis and expected to scale up to 3 lead arrangers for the transaction
Although Disney was an important global client, the deal did not seem that attractive to Chase initially. It had a long tenor (15 years) which banks don t like, it had to contend with the problems at Disneyland Paris, the sponsors wanted to mandate as many as 3 lead arrangers which hurts its economics, and its competitors, especially the local banks like Bank of China and Hong Kong Shanghai Banking Corporation (HSBC), were likely to bid aggressively And so, it decided to bid less aggressively without fear of losing. Yet to protect its reputation, it wanted to bid aggressively enough to make the short list for this high-profile deal. If it happened to win the mandate, it would have to be on terms that met our earnings thresholds
Chase team emphasized its flexibility on key strategic terms, its credentials as a leading syndication bank and its knowledge of and relationship with the local market. For Pricing, Chase indicated that it needed an underwriting fee of between 100 bp and 150 bp, and that the market would probably require interest rate spreads of 135 to 150 bp over HIBOR to accept the deal. Although Chase expected ultimately to bid to lose, it agreed that the deal would be much more attractive if Disney chose to award a sole lead arranger mandate. Disney shortlisted 5 banks for the mandate and asked them to submit final proposal: Chase, HSBC, Bank of China, ABN Amro, Citi Bank, and Fuji Bank.
Chase came up with some creative features to improve the chances of winning:
For example, they suggested splitting the revolving credit facility into two parts, a HK $250 million portion that would be available for construction cost overruns and a HK $750 million portion that would not be available until construction was completed. While the available portion would carry a market based commitment fee of 37.5 basis points per annum, the unavailable portion would carry a discounted fee of 15 basis points per annum. Such leeway was possible given the loan s seniority and modest size relative to HKTP s total capital.
Stress testing the financial implications, Chase decided these credit issues were adequately mitigated by the borrower s conservative capital structure and the govt. s commitment to the project. Chase resolved to show max. flexibility (align its proposal to Disney s request), include covenants requiring min. DSCR
Its fee might be on the high end, but it didn t feel bad about this for 2 reasons:
It was not afraid to lose this deal on up-front pricing it cared about deal quality and profitability, not deal volume. Second, if properly marketed, borrowers viewed the up-front fees in terms of their annual cost, not the nominal first-year cost.
Advantages:
Administrative simplicity: Disney to deal with only 1 lead bank Reduced underwriting risk for Chase Possibly easier syndication given the sub-underwriter support
This strategy required only 2 additional underwriting commitments instead of 4 prior to the general syndication, but it meant sharing league table status as well as giving up two-thirds of the underwriting fee.
Having won the sole mandate, Chase met with Disney to negotiate a commitment letter with final terms, discuss the syndication strategy, and map out a syndication timetable. As with any legal document, the content of a formal commitment letter invariably required negotiation. From experience, Chase knew its standard market flex provision was likely to be one source of contention. The market flex clause that was presented to Disney read: 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.
They didn t want the syndicate to get too big and let the commitments get too small; they did want to give interested banks a chance to participate Participation by HK banks, particularly at the sub-underwriter level, would bring greater political support for the deal and send stronger signals for the deal and send stronger signals to foreign and smaller local banks about deal quality. Also easier to fund a HK dollar loan given their ability to raise HK dollar deposits (i.e. to eliminate currency risks).
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Commitments had to be pro rata for HK$2.3 billion construction term loan and HK$1 billion revolving credit facility, to be received by October 25th It had rights to close the syndication early if it received sizeable commitments quickly