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Chase Manhattan Bank: Disney World Essay

1456 words - 6 pages

MF 820: Management of Financial Institutions Hong Kong Disneyland Finance Ron Shell Jiang Jiang Zhaojie Wang

On August 10th 1999, Disney awarded the sole mandate to Chase Manhattan Bank for the Hong Kong Disneyland financing of HK $3.3 Billion. We believe this decision was beneficial for both parties. For Chase, the rewards included underwriting fee, interest payments, being a part of a big loan-financing project in Asia and developing networks and relationships with Asian governments and companies. This outweighed the risks of underwriting risk, credit risk and long-term collateral risk. In addition, we believe it was the correct decision to initially bid to lose and then change this ...view middle of the document...

We also agree with their decision to revise its decision and to

bid to win after seeing the improvement in liquidity in local syndicated loans market and the increased support from the HK Government. The risks for the loan were clear. Like most syndicated loans, there was underwriting risk and credit risk. Underwriting risk is the risk that the market would not fully purchase the loan from the underwriter. While credit risk was the risk that Disney would not be able to service the debt. Moreover there was collateral risk in that their fallback collateral (Disney’s principal asset) was oceanfront land that would not be built for close to 2 years. On top of that, there was the long-term maturity risk of the loan. It was a 15-year loan where repayments started as late as year 3, in comparison to most loans in emerging markets being between 3 and 5 years. Finally, there was the fact that Disney was planning to use operating cash flow for expansion, which always heightens credit risk. On the other side, the rewards were clear for Chase. Apart from the obvious underwriting fees, closing fees and interest payments, Chase would benefit largely from being involved in such a big syndicated loan in the Asian Markets. This is due to the fact that they were not currently one of the bigger players in the emerging Asian Market and this would help them raise their profile in the region and in addition develop strong relationships with the HK government and local businesses.

We would recommend Disney to sign Chase’s standard commitment letter after negotiating on the details of the standard clause. As the largest syndicated loans provider in the United States, Chase was a leader in this area around the world and its experience could help Disney succeed in this financing project. In this particular deal, it was beneficial to Disney as Chase was willing to provide the maximum flexibility based on Disney’s proposal. For example, Chase offered to fully underwrite the loan on a 15-year basis and allowed Disney’s cash flow expenditures on its future expansion. On the other hand, given the volatility in Asian banking market during that

period, both the risk that Disney could get a loan, and the cost of the loan would increase as time passes. However, there are still some parts of the commitment letter that Disney should take notice on. From Disney’s aspect of view, the market flex clause might give Chase too much power to modify the syndication after they signed the commitment letter. Even though, Chase stated they had never applied the clause in Asia, they were not guaranteed to not apply it later. Furthermore, Chase was the pioneer in the use of market flex, so they could take advantage of using it to benefit them. In order to prevent this happening, Disney should negotiate with Chase to reach an agreement that limits the extent of the market flex clause. For instance, in certain covenant, Disney could limit flex in pricing up to 10 basis points, and not...

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