Banks play a very significant role in steering the financial flow in any country. The banking sector has been at the forefront in establishing mechanisms for ensuring that it not only leads the market in terms of superiority of services but also guarantees the best risk identification, analysis, and mitigation strategies. This paper focuses on Chase Bank. The goal is to investigate its strategy for syndicating the Hong Kong Disneyland loan.
Chase’s International Strategy
Chase Manhattan Bank is a banking institution that has operations in various regions around the globe. The bank is well known for the high-stake loaning deals that it has undertaken over the years. For instance, it has been voted as the leading banking institution in many capacities, including syndicated bank loans among other services (Esty 4). A good example of a syndicated loan-financing project that the bank has undertaken is the financing of the construction of Disney’s Hong Kong Disneyland Theme Park and Resort Complex. The bank was selected to lead the syndicated loan financing activities for raising HK$3.3 billion from among other six banking institutions because of its flexible terms and conditions such as high capital base, which not only offered security but also demonstrated the bank’s ability to lead such a high-level financing project (Esty 7). From its case that involved the syndicated financing of Hong Kong’s Disneyland Theme Park and Resort Complex, it is possible to see the international strategy that the company has adopted. Firstly, the company has built and maintained an elaborate and expensive specialization as an investment institution. For instance, its international offices, which are staffed by more than 400 people, are a crucial indication of the institution’s work and commitment to its area of specialization (Esty 4). The many staff members are vital in ensuring proper decision-making concerning high-level investments and financing programs. They also allow the making of important recommendations to ensure that Chase Bank can win such projects while at the same time ensuring that all risks are identified and considered for the bank to gain benefits from such financing activities. The quote, “we are Investment Bankers, not commercial bankers…” (Esty 1) is a clear indication of the bank’s business strategy of offering valuable advisory services to its borrowers. The goal is to ensure that apart from providing financing, the bank can get the best value of its services while at the same time offering its borrowers the necessary plans on how they can invest the funds to guarantee repayments. As such, the investment bank, which is involved in highly expensive projects, is at the forefront in not only providing the needed finances to its borrowers but also actively engaged in ensuring that the funds are invested well for the benefit of the bank and the borrowers.
Country Risk Analysis
When investing or conducting business across different nations, it is important to consider country-specific factors that significantly influence the success of any activity (Altunbaş, Kara, and Marqués-Ibáñez 437). As a global leader in syndicated financing among other financial investment services, Chase Bank has enormous experience in this area. Hence, it conducts due diligence through country risk analysis. It’s high-stake financing towards the construction of the Hong Kong Disney Theme Park was a culmination of a well-informed country risk analysis. For instance, at first, the company’s approach to bidding for the project was the bid-to-lose strategy. It was evident that the company did not consider winning the bid because the risk was not within the threshold of its risk considerations. However, the government’s high commitment to the project was an indication that the risk would be reduced drastically and hence the reason why Chase Bank decided to adopt the bid-to-win strategy. The government viewed the project as a significant legacy of its tenure where it would provide thousands of jobs to the increasingly unemployed population amid the financial downturn that was being experienced across Asia (Esty 3). Therefore, Chase Bank was justified to view the program as less risky since the government’s commitment showed that it would be at the forefront in ensuring the success of the project. Political risks are a major concern for banks, especially those that hold considerable amounts of government debt. In this case, Chase Bank considered these factors very well. The syndicated funds were sourced from various banking institutions according to their capacity and the full underwriting that ensured that the whole amount was insured. Hence, the bank’s loyalty that was witnessed in Hong Kong and beyond was not threatened by the Disney project.
Corporate Risk Analysis
As an investment banking institution, Chase Bank has a well-established evaluation criterion for determining worthwhile activities and projects to commit its finances and resources. However, since no investment loan is identical to another, such criteria are subject to change, depending on many factors concerning each financing program (Maskara 946). For instance, in the Disney Theme Park investment in Hong Kong, the creditworthiness of Disney was not the only factor that Chase Bank pegged its decision. Another major factor was the close involvement and dedication of the Hong Kong government, which had a higher stake in the project. Hence, it showed higher chances of repayments of the loan. In this case, while the strong relationship and credit worthiness of Disney were vital in the decision-making process, Chase bank did not compromise its standards as evidenced in its financial contract. The treaty clearly stipulated not only the role of each party but also how the repayments would be done, a major part of which was aided by the government’s commitment to the project. Further, Chase Bank also significantly minimized the involved risks through its suggestions on revolving the funds where the project would be financed in phases to ensure any incurred losses would be kept to the minimum (Esty 3). Concisely, Chase Bank did not compromise its set standards concerning financing such big projects. The bank considered all the risk factors before putting important mitigation approaches to ensuring the best outcomes for the bank and the borrowers.
A credit evaluation is a major part of determining the creditworthiness of an organization or an individual (Deli and Santhanakrishnan 558). In a chief project such as the Hong Kong Disneyland Theme Park and Resort Complex, the ownership structure of the debt was a central evaluation factor that Chase Bank considered to determine the viability of the project and the likelihood of repayments for its financing. From the exhibits that have been provided to demonstrate the ownership structure, it is evident that government investment to the tune of HK$ 9.342 billion in terms of government loans and equity has an ownership of 66.4% of the project, which is a primary indication of the government’s involvement and commitment to successful completion of the project (Esty 12). On the other hand, Walt Disney provided HK$2.449 billion. The figure translated to 17.4% financing of the project. Lastly, bank loans covered the remaining HK$2.275 billion. This number turned to only 16.2%, which was the minimum share of the financing proceedings that were invested in the project (Esty 12). The ownership structure of the project provided significant insights that informed the credit evaluation and final financing decision-making. The Hong Kong government took a high stake in the project. This situation reduced the number of financial resources drastically through bank loans that would have otherwise been required if the project were to be undertaken by Walt Disney alone. In this case, the breakdown of finances and ownership provided a firm basis for the project where its success was almost a certainty, owing to the positive outcomes that were expected in Hong Kong. Consequently, the government was committed to ensuring the success of the project. The involvement of Walt Disney, which is experienced in running such businesses, was a significant boost to the viability of the project since it not only enhanced success in other activities but also led to a strong financial base through its international activities that were linked to theme parks among other businesses. However, the elimination of the HK$14 billion land reclamation costs, which was later factored in the ownership, could probably change the financing planning drastically. This move had far-reaching implications to the credit repayment agreements that were already in place. Therefore, it was important for stakeholders to discuss these implications before making the final decision on whether to advance the credit facility with the same terms or to adjust accordingly. However, to mitigate this problem, Chase Bank had already established a clause that allowed the agreements to be changed over time, depending on the arising issues that greatly influenced the borrower’s ability to repay the loaned amount. Concisely, the ownership structure of the project was a significant factor that positively influenced Chase Bank’s willingness to consider financing the project through the syndicated financing approach.
The Chase Bank considered three main financing approaches, which were all based on the company’s desire to reduce the risk to the minimum while at the same time ensuring smooth management of the project financing. In the first approach, the focus on Chase Bank as the leader and the sole manager of Walt Disney ensured management simplicity for Walt Disney (Esty 6-7). However, due to a large amount of funding that was needed, the shortcoming of the option was that the other banks in the syndication, especially the ones that provided an equal amount of financing as the Chase Bank at HK$300 million, were most likely to have a say in the whole process. On the other hand, Chase Bank, which was the sole underwriter, gained all the underwriting fees. The figure was an impressive amount for the bank. In the second approach, Chase Bank involved two other banks to have a joint mandate and underwriting commitment. In this case, the risks that were related to underwriting were much spread. Similarly, the earnings from the underwriting fees were shared among the three primary banks in the syndication. The last option, which combined the first and second strategies, gave Chase Bank the sole mandate as an underwriter. The involvement of many banks in the financing increased the risk drastically. From the examples of other syndicated loan facilities that were offered in Hong Kong, the Cheung Kong Finance Co. Ltd Pact presented the best case upon which Chase Bank could base the financing of the Walt Disneyland Theme Park in Hong Kong. In this case, Chase Bank should have opted for the second financing arrangement where it invited two other banks to have a joint mandate and underwriting of the loan. However, this alternative was not chosen since Disney opted to allow Chase Bank as the sole underwriter of the financing of the project.
Loan Syndication Arrangement
As the sole underwriter, Chase Bank undertook a major risk since any loss or inability of the borrower to repay the loan would have had far-reaching effects on the bank’s bottom line. The Chase Bank had the mandate of ensuring that all other banks received their money back. Hence, it is clear that the risk was very high. However, on the positive side, the bank received an advanced mandate and involvement in the project as the sole underwriter. Hence, the bank did everything within its powers to ensure that it could receive its money bank. Further, as an underwriter, the bank received the whole amount of the underwriting fee, which was set at 1.25%. This figure was a product of 125bp of the HK$3.3 billion loans, which totaled HK$41.25 million (Esty 17). In this case, despite the high risk, the bank was assured of high earnings from the underwriting fees if all its undertakings in the project were successful.
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Deli, Daniel, and Mukunthan Santhanakrishnan. “Syndication in venture capital financing.” Financial Review 45.3 (2010): 557-578. Print.
Esty, Benjamin. Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan (A). Boston, MA: Harvard Business School, 2003. Print.
Maskara, Pankaj. “Economic value in tranching of syndicated loans.” Journal of Banking & Finance 34.5 (2010): 946-955. Print.