Chases strategy for syndicating the Hong Kong Disneyland project

Objectives
Illustrate The process, participants, and economics of syndicated lending The key issues in designing a syndication strategy How many banks to invite? What fees to offer? What share of the loan to hold? Resolution of these questions depend on a variety of factors including economic reward, risk tolerance, agency considerations, and contracting (or re-contracting) costs The importance of relationships in syndicated lending The lending process from a banks perspective and the differences between making a loan and arranging/underwriting/distributing a loan.

How to bid for the mandate?

Need to evaluate the risks (credit and syndication) and returns (financial and reputational)

Risks
Joint mandate lower underwriting fees Aggressive competition reduces profitability Disneys bad track record Credit issues (long maturity, limited collateral, CFs to be used for CapEx, no willing to subordinate management fees and royalties to debt service) Fully underwritten deal underwriting risk

Reasons to bid
Chase wants to maintain its relationship with Disney Might enhance Chases reputation in the region Despite the risks, might be profitable if the deal is designed carefully

Negotiating a commitment letter

The issue is whether the letter should include the market flex clause

Whats the difference between material adverse effect (MAE) and the market flex provisions?
The inclusion of the market flex provision appears to be inconsistent with the concept of an underwritten deal. It could be argued that this provision transforms an underwritten deal into a best efforts deal Chase argues its only a fine tuning tool and rarely invoked Why doesnt Chase consider hedging its interest rate risk? Perhaps, flexibility could be provided in some but not all contract terms. Which ones?

Syndication strategies
1. Decide on a one-stage vs. two-stage syndication (general syndication vs. sub-underwriting followed by general syndication) Set appropriate fees, titles, and commitments for each level Determine final hold positions (loan shares) Determine an invitation list (how many banks, which banks, etc.)

2. 3. 4.

General syndication vs. sub-underwriting

Sub-underwriting is an optional, wholesale, phase of syndication and the general syndication is the retail phase Sub-underwriting allows Chase to reduce underwriting risk and expedite the syndication process. However, the underwriter loses fees and league table status Some borrowers may request sub-underwriting to reward certain relationship banks with senior status and increased compensation

Set appropriate fees, titles, amounts

Because interest rate spread and underwriting fee are set in the commitment letter, the key decision is not how much to charge the borrower, but rather how much to share with participating banks. During general syndication, the goal is to determine the lowest possible fees that will generate the required level of commitment. In a best efforts mandate, in contrast, the lead arranger has little motivation (other than good will) to hold fees down because the borrower is paying the banks. Using comparable transactions analysis to set fees might be a good idea Setting commitment amounts requires great deal of judgment regarding the markets appetite for the deal Titles are purely ceremonial because banks other than the lead arranger perform no functions other than lending

Chases final hold position

Chase would prefer small holdings
Diversification and banking regulation: Global banks typically set $20 to $40 million target hold positions in large syndications Chase could maximize its fees by distributing much of the loan to low-tier banks Chase wants to build a base of loyal investor banks by allocating them lots of credit

It is common for the borrower to want the lead bank to hold a relatively large share of the financing:
the borrower wants the bank group under strong leadership over the life of the loan Administrative convenience and voting control Confidentiality

Other syndicate banks want the lead bank to hold more too:
Higher holdings signal better deal quality (remember the lead bank screens and monitors the borrower on behalf of other lenders) The lead bank makes more money out of the deal than other syndicate banks, so the other banks want the lead to have higher credit risk exposure

Determine an invitation list

The list will depend on whether the deal is sub-underwritten or not

Re-contracting and agency costs are higher in larger syndicates

However, larger syndicates may be more effective at deterring strategic or voluntary default either because the threat to withhold future lending is more credible or because re-negotiation is more costly Identification of potential invitees:
Appetite for Asian credit exposure Likelihood of approving the deal Satisfactory track record as an investor bank in previous Chase-led deals.

Domestic banks face less currency risk, will support the project to prop up the local banking market, and their participation can provide a stamp of approval for foreign banks.

Outcome
Sub-underwriting
Invited 7 banks for underwriting commitments of HK$600 million Offered lead arranger titles and sub-underwriting fees of 25 bps 6 banks agreed to participate

Launched general syndication with invitations to 67 banks:

Arranger tier HK$250 million (up-front fee 70 bps) Co-arranger tier HK$150 million (up-front fee 60 bps) Lead manager tier between HK$75-100 (up-front fee 50 bps) The deal was oversubscribed: 25 banks committed HK$5.3 billion in total. Counting the HK$4.2 billion in commitments from the 7 sub-underwriters total commitments amounted to HK$9.5 billion.

Of the 42 banks that declined to participate, 25 cited concerns about the tenor, 8 cited concerns over pricing