Case Study 4
Case Study 4
In late 1999, the Walt Disney Co. and the Hong Kong government agreed to develop Hong Kong Disneyland, a theme park and resort complex worth HK$28 billion, which planned to open in late 2005. The selected underwriter, Chase Manhattan Bank, needed to raise HK$3.3 billion of non-recourse bank loans for construction and working capital of the project.
The key concerns facing Chase were whether to bid at all, how to bid and how to structure the syndication to meet the borrower’s needs and its own ...view middle of the document...
3 billion to HK$660 million as the risk is shared with 4 sub-underwriters. It is also easier for administrative purpose and generating successful syndication as Disney only need to deal with Chase, as Chase is the sole-mandated arranger and the sub-underwriters support is meaningful.
* Strategy 2:
Chase would cooperate with 2 other banks to commit the joint underwriting and skip the sub-underwriting phase. This strategy involves 18 banks at 4 levels. Chase and other two banks would underwrite HK$1.1 billion respectively and contribute HK$300m in the general syndication. The other participants including 4 arrangers at HK$250M, 6 co-arrangers at HK$150M and 5 lead managers at HK$100M respectively.
This strategy required only 2 additional underwriting commitments instead of 4 compared with Strategy 1, which would decrease the underwriting risk for Chase but it would also decrease the underwriting fee revenue by two-thirds as well as the league table status. Moreover, it would increase the negotiation difficulties as Disney needs to contact the three underwriters instead of one and Chase would lose its lead role in the syndication process.
* Strategy 3:
Chase would act as the sole mandate arranger, which skip the sub-underwriting process and start the general syndication directly. 21 banks involved including 4 arrangers at HK$250M, 8 co-arrangers at HK$150M and 8 lead managers at HK$100M respectively, which result in the largest syndicate as measured by the number of banks.
Compared with Strategy 1 and 2, this option significantly improved Chase’s compensation and league table status but it also put Chase into the most risky situation because Chase would bear all the risks associated with underwriting.
Given the fact that Chase is the dominator in U.S Syndicated loans and the global project loans, it has less influence in Asian region (see Exhibit 6a, b, c), this would be an great opportunity to work with other top Asian project finance arrangers such as HSBC and Citigroup to increase its reputation in Asia. Therefore, obtaining the sole mandated lead position would help Chase to build closer relationship with HK government and regional business. Although Strategy 1 is less profitable than Strategy 3, it also exposes less risk. By looking and the HK market conditions 1990-2000 (Exhibit 2), we know that after the Thai crisis in 1997, the market is very volatile and this increased the credit risk if Chase decides to fully underwrite the project.
As a result, I strongly suggest strategy 1 as the option. So we need to determine which banks need to be contract to form the HK$3.3 billion syndicate loan. By looking at the likely participants from Exhibit 9 and cross-match with Exhibit 8. I suggest the 4 lead arrangers: ABNAMRO, Bank of America, Citibank and HSBC; 4 co-arrangers: Bank of East Asia, Hang Seng Bank, Shanghai Commercial Bank and Wing Lung Bank; while I choose Bank one and CBA as the lead managers. I...