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FINC 627 – Case Assignment: Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan

Background

Banking is a universal business. Its techniques are applicable to the broadest range of economic activity. Banks are uniquely active in diverse business environments. This is demonstrated by the presence and involvement of dozens of the world’s largest financial institutions in significant banking businesses outside their own countries. Banking provides transferable skills and resources which are readily applicable in other economic systems.

International banking provides a multiplication of opportunities for profitable business. Overseas activities by large banks fit into very different dimensions reflecting the strategies of the organizations. Citigroup and the Hong Kong Shanghai Bank have strong emphases on mass-market retail activity aimed at expanding middle class customers. Japanese banks focus on the provision of financing to their major corporate customers especially those within their domestic business groups. Money Center banks from New York, London and Germany are vigorously involved in sophisticated lending and capital markets activities. Large banks from America, Asia and Europe seek the rapidly growing opportunities in emerging national economies by providing loans to governments, major economic projects and growing local companies.

The risks of international banking include all of those of complex domestic banking. They are further compounded by the dimensions of country risk (evaluating the stability and economic viability of a foreign economy); foreign regulations and business practices (ranging from severe control of financial activity by government agencies to rampant corruption in the public sector); and currency exposure.

The Case of Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan provides an illustration of many of the most important dimensions of international banking for a major bank and a major company. As a global leader in the most sophisticated capital markets transactions Chase emphasized major transactions with governments and large corporations (especially its American clients) in which risk evaluation and complex structure were of great importance. As a major international company Disney is concerned with obtaining the best conditions for its borrowing and for the continuing profitability of the project with minimum risk.

Factors

The case focuses on principal considerations of international banking.

1.Chase’s international strategy and objectives.

2.Country Risk evaluation – Hong Kong.

3.Corporate risk – Disney Company.

4.Project risk – Hong Kong Disneyland.

5.Financing structure – HK$3.3 billion syndicated loan.

6.Loan Syndication management.

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Assignment

Following your reading of the assigned article in the casepack you will be expected to be prepared for a class discussion of the subject. This case is available for Group and Individual reports.

Expectations

The reports will address the following issues:

1.Chase’s International Strategy – the bank was committed to its standing as a leader in major international transactions. What were the principal benefits for Chase in building and maintaining a very elaborate and expensive specialization – including over 400 people in the major capital centers of the world? The first quote at the beginning of the case is “We are investment bankers, not commercial bankers…”

Explain the basis of that comment and how it reflects Chase’s business strategy.

2.Country Risk Analysis – banking involves permanent commitments to allocating capital to new areas of activity. “Country risk” represents the combination of unique factors which can affect credit and investment exposure – regional tensions, domestic politics, government regulation, economic cycles, and other factors. In the Disneyland project Chase had to consider a series of new conditions – Hong Kong has been restored to China as a Special Administrative Region. Hong Kong’s economy appears to be in a long-term readjustment to the loss of its special status as entry point to China and Southeast Asia. At the same time the rapid growth of China’s economy could provide new benefits for Hong Kong. Viewing the country information provided in the case and the commitments involved in the Disneyland syndication how could Chase justify a long-term commitment to the project? What is your view on the risk involved for Chase and for smaller banks with more discretion about their international commitments?

3.Corporate Risk Analysis – clearly Disney is an important company with a high credit rating. Chase would have to update its evaluation but there is no doubt about Disney’s creditworthiness. Based on its strong relationship with Disney Chase made strenuous efforts to deal with the syndication proposal. Examine Chase’s processes. Do you think the bank compromised or reduced its standards for a deal of this kind because of the strong Disney relationship? Comment on the considerations within the Chase/Disney relationship which were motivations for the bank’s actions.

4.Project Analysis – the credit evaluation of the project is based on the ownership structure, the commitments of the two principals – Disney and the Hong Kong Government – and the financial structure of the project itself (Exhibit 5). Review the ownership structure and the important implications for a credit decision. Are there any potential difficulties with the structure or with the credit over the long run? Do the sources, availability and uses of funds appear to provide for a solid base for the project?

5.Financing Structure – Chase developed several alternative strategies for the syndication (Exhibit 8). Review the strategies and the differences involved. Comment on the essential differences and Chase’s thinking in creating these differences. Chase based its syndication loan structure on past transactions for major Hong Kong entities (Exhibit 7). Review those transactions. Which provides the best guide to the Disneyland project? Why? How do the other transactions provide guidance and what elements appear to have influenced the Chase Disneyland proposals?

6.Loan Syndication Management – leadership of the bank syndication was a major business triumph for Chase. Review the risks Chase undertook as the principal underwriter of the syndicate and the rewards it earned for its key position. Focus on Chase’s risks and rewards – do not deal with a detailed analysis of the syndication alternatives.