The Walt Disney Companys

Yen Financing

Agenda

Currency Risk
Company Background
Disneys Dilemma
Potential Solutions
Disneys Currency Swap
Swap Proposal Analysis
Recommendation

Currency Risk
Transaction Exposures
Start with a commitment to receive income in
foreign currency or to make a foreign currency
payment at some future point.
Translation Exposures
Economic Exposures
Arise when the trading position of a business is at
risk to adverse movements in exchange rate.

Currency Risk Management

Transaction-based Structural hedging

Fundamental rule of foreign currency
management is to minimize possible exposures
by matching exposures that occur in opposite
direction.

Other hedging tools

Company Background
Founded in 1938
Diversified international company
Lines of operation:
Entertainment and recreational complexes
Motion picture
Television features
Developing community real estate projects
Consumer products

Disneys Financials in 1984

Consolidated revenues were $1.7 billion (Increased
27% )
Net income was $97.8 million ( Increased 5%)
Total assets grew 15% to $2.7 billion after the
acquisition of Arvida
Borrowings more than doubled to $862 million

The Problem Facing Disney

Significant yen royalty receipts

8 billion Yen in 1984
Expected to grow at 10% to 20% per year
Yen depreciated 8% last year

Repay high interest rate short-term bank loan

Due to the acquisition of Arvida,

debt/capitalization ratio jumped to 43% from 20%
Two-thirds of borrowings at the end of 1984 were
high interest rate short-term bank loan

Disneys Dilemma

Should Disney hedge?

How much should they hedge?

If so what technique should they use?

Hedging Action: the Choices

Are exposures in the
currency large or
small?

Small

Large

Attitude to the risk

Risk
Seeking

Risk averse

Risk is
unacceptable.
Taking hedging
action.
Either

Partial
hedging of
some
exposures

Encourage
exposures
where
possible
Or

As much
hedging of
exposures
as possible

Risk neutral

Take no hedging
action.

Disney need to hedge

Exposure in the currency was large.

Significant royalty receipts.
Yen depreciated 8% against dollar from 1983 to
1984.
Royalty receipts weighted 17.6% of before-tax income.
Disney was risk-averse.

Potential Solutions
Four types of typical hedging solutions:
Currency options
Forward contracts
Future contracts
Currency Swap
15 billion 10 year bullet loan

Currency Options

Buy Yen put option

Advantages
Right not the obligation
Avoid the risk of adverse rate movement at the same
time benefit from any favorable movement
More suitable if there is more uncertainty
Provides more leverage but also more risk at the
same time
Disadvantages
No liquid markets for options with a maturity of 2
years or more
Up-front premium which is higher for longer terms

Forward Contract

Advantages
Avoid adverse movement
Negotiable for the size & term.
Viable for Disney to hedge royalties for 10 years.
More flexible than SWAP agreement because contract is
renewable each year. (Assume buy forward every year)
Disadvantages
Limit the upside potential
Obligation, commitment
Credit lines would be tied up
Default risk

Future Contract

Advantages
Standardize contract size
Marking to market
High liquidity and easy to close position
Can be traded in smaller amounts
Do not affect the credit line
Disadvantages
Commission
Cash deposit must be paid as margin
Not easy to customize
Short periods only

SWAP

Advantages
Off balance sheet.
Parties could customize the terms
Right of offset clause
SWAP would enable what parties cant get directly from
capital markets.
Disadvantages
Pay fees and expenses to intermediaries.
Parties may not engage in perfect hedge.

15 billion 10 year bullet loan

Advantages
Disney would be able to hedge for 10 years
Based on Japanese long-term prime rate

Disadvantages
0.75% front-end fees
More expensive than SWAP
Balloon payment at the end of period wont be good
match for Yen royalties
Lump-sum payment may create sudden jump in debt
ratings

Disneys Currency Swap

1st. Take ECU80 million tenyear Eurobond

2nd. Lend ECU80 million matching cash outflows of

Eurobond

3rd. At current spot rate, borrow in Yen equivalent of

ECU Eurobond

SWAP
Yen

ECU

Yen
French Utility

Walt Disney
ECU

Walt Disney

French Utility
Yen

ECU

OPTION 1 without SWAP

Disney

Disney

6.89%

French Utility

French Utility

ECU
YEN

7.61% YEN

15 billion 10 year bullet loan

OPTION 2 with SWAP

9.37%

ECU

6.83%

9.19%

Our Recommendation

One caveat of swap: Fees are not included. But we

believe it will still be more attractive after fees.
Swap will not only be more appealing in terms of cost,
but also will help Disney enjoy intangible benefits such
as peace of mind and focus on its operation.

Disney should accept Goldmans proposal

of ECU bond issue accompanied by
ECU/Yen swap

Q&A