Chase’s Strategy for Syndicating the HK Disney Loan Total Number of Words 273 Introduction Out of 17 major banks, Chase was chosen to finance the construction of HK Disneyland theme park and the resort complex (Esty, 2013a, p. 1). Basically, this paper will discuss the concept of project financing followed by explaining how HK Disneyland loan is considered as a project financing loan. After discussing how Chase bid the first competition, the meaning of ‘fully underwritten deal’ and ‘non-recourse finance’ will be clearly stated. Eventually, the risks associated with such deal will be explained in details.
After identifying important considerations before signing the standard commitment letter, specific parts that need to be removed or altered will be tackled in details. Eventually, recommended syndication strategies for the loan will be highlighted in this paper followed by discussing how each of these syndication strategies can affect Chase’s risks and returns as the lead arranger. How HK Disneyland Loan is considered as a Project Financing Loan Project financing is a type of limited financing wherein the terms of debt are highly dependent on the actual performance of the project.
HK Disneyland loan is considered a project financing loan because of its 15 years maturity period which is longer than the usual maturities of corporate financing loans, the loan has been extended in HK which is outside the boundary of the United States and in a much riskier country, and HK Disneyland has tangible assets that Chase may consider as a ‘fallback collateral’ (Esty, 2013a, p. 5). How Should Chase Bid the First Round of Competition? Three approaches that Chase had considered include: ‘bid to win, bid to lose, and no bid’ (Esty, 2013a, p.
4). ‘No bid’ should not be an option because it will remove Chase’s opportunity to earn profit from high-profile deal. As such, Chase will automatically lose high-profile deal to its aggressive competitors like HSBC and the Bank of China (Esty, 2013a, p. 4). Bidding aggressively increases the risks wherein Chase will not be able to meet their earning targets (Esty, 2013a, p. 5). Bidding to lose means that Chase will have lesser chance of winning the mandate. It means that even though Chase would protect itself from risky long-term deal, the bank also sets limit to the possible returns it could get out of its relationship with Disney.
Therefore, instead of immediately bidding aggressively or bidding to lose, Chase should carefully evaluate and analyze the risks and returns associated with their syndicated credit abilities. For instance, potential return could mean strengthening the bank’s relationship with Disney on top of improving its global reputation as the best lead arranger of syndicated finance whereas potential risks include the loan’s credit risks, etc. Associated Risks and Differences of ‘Fully Underwritten Deal’ and ‘Non-Resource Finance’ ‘Fully underwritten’ deal means that the lead arranger is responsible or 100% committed in providing the terms and prices (Esty, 2013a, p.
20) whereas the ‘non-recourse financing’ means that the lender would determine the ability of the borrower to pay back the loan simply by looking through the project’s cash flow. Disney desires to have a fully underwritten deal plus the HK$3.3 billion non-recourse loan and the option to select a maximum of three (3) lead arrangers (Esty, 2013a, p. 3). In theory and practice, the risks associated with ‘fully underwritten deal’ include the fact that the underwriter or the lead arranger takes full risks in case of uncertainty such as market failure or the risks of force majeure.
To protect the underwriter from the uncontrollable market failure or force majeure risks, the fee of underwriter is generally much higher in a ‘fully underwritten deal’ (Esty, 2013a, pp. 17-18). Based on the case study, HK Disneyland has no other collateral on top of the site which will be constructed on a future date. In fact, during the bidding period, the construction site for HK Disneyland was still scheduled for reclamation (Esty, 2013a, p.
3). Therefore, in case of non-recourse finance, Chase will take higher risks in case the borrower fails to pay back the loan. Considerations Before Signing the Standard Commitment Letter The standard commitment letter itemizes and confirms the final agreed amount of loan, the terms for payment and the syndication strategies in details (Esty, 213a, p. 20). Before signing the letter, Chase should consider all possible changes that may occur in both internal and external environments within the agreed 15-year term.
For example, Chase should remove all clauses that will limit the option for future negotiations (Esty, 2013a, pp. 7-8). To protect the welfare of the bank, the underwriter may decide to include a clause which allows the bank or the underwriter to have the option to withdraw their commitment especially in case of future misunderstanding between the borrower and the lender. The presence of ‘market flex’ can cause serious problem on the part of the borrowers (Esty, 2013a, p. 7). To maintain a win-win situation between Disney and Chase, the underwriter may also include a clause for renegotiation in case of over-subscription or overpricing (Esty, 2013a, p.
7). Effects of Syndication Strategies on Chase’s Risks and Returns as the Lead Arranger Chase presented two syndication strategies to Disney. The first option is that Chase will play the role of a ‘sole mandated lead arranger’ with the option to invite four other banks as its sub-underwriters (Esty, 2013a, p. 6). Basically, the first option will lessen the underwriting risks on the part of Chase plus benefit from the support of sub-underwriters.
Using option 1, Chase’s exposure in general syndication can be reduced to HK$660 million as compared to its maximum exposure of HK$3,300 million. (See Appendix III – Risks and Rewards for Chase on page 11) The second option is that Chase plus two (2) other banks will share ‘joint mandated and joint underwriting commitment but with no sub-underwriting’ (Esty, 2013a, p. 7). The second option means that Chase will have to give up 2/3 of underwriting fee on top of the need to share the league table status with other banks.
Using option 2, Chase’s exposure in general syndication and its maximum exposure is HK$1,100 million. (See Appendix III – Risks and Rewards for Chase on page 11) Option 3, not presented to Disney, is a combination of both option 1 and 2 which means that Chase will be the sole mandate with no other sub-underwriters (Esty, 2013a, p. 7). The third option will expose Chase to higher credit and syndication risks but increase the chances of improving Chase’s league table status and future compensation.
Using option 3, Chase’s exposure in general syndication and its maximum exposure is HK$3,300 million. This figure is so much higher as compared to Chase’s exposure when using option 1. (See Appendix III – Risks and Rewards for Chase on page 11) Recommended Syndication Strategy Considering the case of HK Disney, the best syndication strategy is one that can reduce the bank’s credit risks (Esty, 2013b, p. 1). Often times, this includes having sub-underwriters who can share the commitments with Chase. As compared to a single-stage general syndication, it is best to choose the two-stage syndication plus sub-underwriting before the actual general syndication so as to reduce Chase’s exposure to credit risks.
Likewise, the two-stage syndication plus sub-underwriting before the actual general syndication will enable Chase to win the support of other banks in case of being exposed to uncontrollable risks (Esty, 2013a, p. 21). Conclusion The goal of syndication strategy is to reduce the exposure of lead arranger(s) to credit risks. In the process of making the offer more attractive to other banks, it is possible for the lead arranger can increase the committed amount from all banks as compared to what the lead arranger banks can commit. References Esty, B.
(2013a). Chases strategy for syndicating the Hong Kong Disneland loan (A). Harvard Business School. 9-201-702. Esty, B. (2013b). Chases strategy for syndicating the Hong Kong Disneland loan (B). Harvard Business School. 9-201-086. Appendix I – Possible Syndication Strategies for Chase (Millions HK$) Per-Bank Sub Amount Per-Bank Underwriter Underwriter Closing Pool Sub- Amount Total Cumulative Chase Max Lenders Fee Fee Fee Income Underwritten Held Allocation Share Exposure Chase Sole Coordinating Arranger, with 4 sub underwriters Coordinating Arranger (Chase) 1 $9,900 $1,650 $2,100 $200 $13,850 $300 $300 9.1% $3,300 Sub U/Ws 4 $1,650 $2,100 $200 $3,950 $300 $1,200 45.5% Arrangers 4 $1,750 $1,750 $250 $1,000 75.8% Co Arrangers 4 $900 $900 $150 $600 94.0% Lead Managers 2 $500 $500 $100 $200 100.0% 15 $3,300 Note: (1) Closing fees of Chase, lead arrangers (Sub U/W), and Arrangers @ 0.70%; closing fees of co-arrangers @ 0.60%, and closing fees of lead managers @ 0.50%; (2) Underwriting fees of Chase @ 0.30% whereas underwriting fees of lead arrangers (Sub U/W) @ 0.25%; (3) Chase with 2 other Coordinating Arrangers, no sub underwriters Coordinating Arranger (Chase) 3 $300 $900 27.3% $1,100 Sub U/Ws 0 N/A Arrangers 4 $250 $1,000 57.6% Co Arrangers 6 $150 $900 84.9% Lead Managers 5 $100 $500 100.0% 18 Chase Sole Coordinating Arranger, no sub underwriters Coordinating Arranger (Chase) 1 $300 $300 9.1% $3,300 Sub U/Ws 0 N/A Arrangers 4 $250 $1,000 39.4% Co Arrangers 8 $150 $1,200 75.8% Lead Managers 8 $100 $800 100.0% 21 Appendix II – Allocation of Fees in Three Syndication Strategies (Millions HK$) Per Bank U/W Sub U/W Closing Fees Fees w/o Pool Fees w/ Pool (Per bank) Chase Sole Coordinating Arranger, with 4 sub underwriters Coordinating Arranger (Chase) 1 $9,900 $1,650 $2,100 $13,650 $13,850 Sub U/Ws 4 $1,650 $2,100 $3,750 $3,950 Arrangers 4 $1,750 $1,750 $1,750 Co Arrangers 4 $900 $900 $900 Lead Managers 2 $500 $500 $500 15 Chase with 2 other Coordinating Arrangers, no sub underwriters Coordinating Arranger (Chase) 3 $9,900 $3,300 $2,100 $15,300 $15,500 Sub U/Ws 0 n/a Arrangers 4 $1,750 $1,750 $1,950 Co Arrangers 6 $1,050 $1,050 $1,050 Lead Managers 5 $700 $700 $700 18 Chase Sole Coordinating Arranger, no sub underwriters Coordinating Arranger (Chase) 1 $9,900 $3,300 $2,100 $15,300 $15,500 Sub U/Ws 0 n/a Arrangers 4 $1,750 $1,750 $1,950 Co Arrangers 8 $1,050 $1,050 $1,050 Lead Managers 8 $700 $700 $700 21 Appendix III – Risks and Rewards for Chase Chase Exposure in General Syndication Chase Max.
Exposure Chase Fees / Chase General Syndication Exposure Sole Coordinating Arranger, 4 Sub Underwriters HK$3,300 HK$660 0.021 Three Coordinating Arrangers, no Sub Underwriters HK$1,100 HK$1,100 0.008 Sole Coordinating Arranger, no Sub Underwriters HK$3,300 HK$3,300 0.007