Chase International Strategy
Chase was seeing the opportunity as an avenue to facilitate investment financing and build its reputation as the go-to bank for all international investment financing. The location of the project would provide some challenges. At the same time, the local circumstances would allow Chase to expand its internationalization program and attract more clients from around the world. Having staff in its offices in all major cities around the world gave the bank an early entry advantage, where it retained a visible brand for any company or public entity to notice. In this regard, the bank was positioning itself elaborately to be the undertaker, underwriter, and syndicate loan organizer for joint public-private investments that were large scale. Besides, the international strategy for the bank was to follow the client rather than wait for the customer to come to the bank. As a major player in global business, Disney was a major client that had a local office in Hong Kong. The location helped investment groups like Disney and the Hong Kong government to be comfortable with their risk exposure when contracting Chase as their loan manager.
When Chase says, “we are investment bankers, not commercial bankers,” it refers to the core business of facilitating buying, selling, and building of investments such as stock, shares, bonds, stakes, and any other kind of investment. Also, an investment banker is capable of arranging initial public offerings and syndicating loans. Therefore, the statement by Chase was a clarification of its core business and a claim of its authority and experience in the business of investment banking. Besides, the claim of being an investment bank allows a firm to expand beyond traditional country regulations about financial affairs. The claim implies correctly that the bank has leeway to arrange the movement of capital across different markets. As an international bank, Chase would be well poised to handle the deals of its clients; Disney and the Hong Kong government.
Country Risk Analysis
Hong Kong may no longer enjoy the privilege of being the Asian tiger as other economies also grow economically and liberalize their investment climates. On the other hand, the return to China’s governance structure could limit the liberalized nature of Hong Kong markets and allow the government of China to manage potential returns for every investment. Changes in investment laws can induce a loss of profitability and expose financial arrangements, such as the one developed by Chase. It would make it impossible or riskier for collaborators to proceed with a particular investment decision. Having government goodwill for the project would reduce the risk of project failure due to local government limitations and interference. Therefore, the Disneyland project and Chase face a small financial risk.
Besides, the social and cultural outlook of Hong Kong is positive concerning its acceptance of westernized culture, especially in the entertainment business that Disney is seeking to enter into as a Disneyland project. As the case shows, there was enthusiasm for the project’s progress from the local business community, a sign that the project would be a success upon completion. The local business community understands the local risks of operating businesses, including the attractiveness of various business concepts. Therefore, the enthusiasm shown by this community is a positive sign of lower cultural and social risk of the project.
The biggest threat facing Chase is the legal framework to use in the project in its different phases, given the ongoing transition from the Hong Kong economy into the Chinese economy. As a separate entity, Hong Kong has been able to attract global investments due to its autonomy and liberalized economy. Nevertheless, China may demand financial interventions in the Hong Kong economy directly or indirectly through various Chinese business and investment activities. Currently, investors are shying away from the Chinese market for the lack of faith in the government. The same situation could extend to Hong Kong and make it difficult for Chase to bring up new syndicate loans, despite success with the Disney-Hong Kong government project (Po-lam para. 1-2).
Corporate Risk Analysis
It is possible that Chase relied on Disney’s roots in the United States and its past performance more than the viability and risk factors of the proposed Hong Kong Disneyland project. For example, from the onset, it was Chase’s biggest desire to win the project. The zeal would likely create scrutiny loopholes on the part of Chase. The bank appeared to focus more on building its reputation as the leader syndicate-loan arranger for the project and cement its position as a deal maker in the Hong Kong economy. The bank even admitted that the deal was not very attractive from the initiation point in terms of finances and monetary rewards. Disney was looking for three arrangers, which would reduce the profit opportunity for Chase while exposing the bank to the financial risk of project collapse and partner disagreements.
Nevertheless, Chase made a smart move to bid to lose and at the same time ensure that winning the bid would allow it to meet its earnings target. From the case study, as negotiations persisted, the investment environment changed with the tightening of liquidity and involvement of the Hong Kong government. While these events helped to reduce the risks facing Chase and explained its modification of the terms, the circumstances did not take away the initial reservations about the deal as considered by Chase. The terms demanded by Disney remained unusual for international projects. For example, the company would use its cash flow for the project to expand, instead of meeting its loan obligations. It would also have a three-year break before starting repayments. The concerns were topped by the nature of the project, which was to be built on reclaimed land on the ocean. There would be no collateral for the project in the first two years. Delays in reclaiming the land would also lead to delays in Chase getting sufficient collateral for the syndicated loan (Esty 5). Based on the discussion above, Chase reduced its standards of financial project scrutiny. Nevertheless, the bank relied on its relationship with Disney, a long-term perspective of the deal, and its reputation to get involved.
The Hong Kong Government has an obligation that gives it the largest share of debt financing in the project. Also, the government is also going to finance and oversee the land reclamation project whose capital outlay is likely larger than the entire project. On the other hand, as a government, it is possible to source and allocates additional funds from the fiscal income of the government in case the project estimates go beyond the current valuation. On the other hand, Disney is committing equity slightly larger than its commitment to the bank term loan for the entire project.
However, the government also harbors the largest share of equity financing, which makes it the principal determinant of the project’s success. Given the inherent political risk of governments, their involvement in projects remains questionable. In this case, the sources of funds appear to provide a solid base for the project, but the availability of funds promised by the government can change due to external circumstances and other government obligations.
The project is relying on 59.5 percent debt financing, which increases the overall risk of delays and ownership structure (Esty 12). Too much exposure to debt gives the principal partners a limited scope for renegotiating additional debt, given that they are already exposed. The additional debt will only dilute the physical stakes of the two principal partners in the project. In this regard, the need for additional credit, in the end, may not be fulfilled without risking the loss of project ownership.
The first strategy by Chase was to have the sole mandate and use sub-underwriting so that it lowers its commitment to providing the loan. It would also take a controlling role in determining the fees due to other banks helping to raise the total loan amount. This strategy would ensure that Chase least exposed itself to the risk of the project and retained a controlling position for determining the highest earnings for its syndication role. The second strategy was informed by a need to comply with the expectation of the client. In this case, the strategy followed Disney’s demand that Chase had a joint mandate with two other banks as the coordinating arrangers.
With the three bands sharing the controlling role, there would be no lead arranger and no underwriting. The last strategy would see Chase bear all the risk and retain all the control in the arrangement at the same time. This approach would work as an alternative if there were no agreements reached with other bands for the lead arranger or underwriting parts of the loan. From the other transactions of the major Hong Kong entities presented in the case, the period of the loan, the existence of upfront fees, and the presence of other lead arrangers appeared as the primary influences of Chase’s strategies. Besides, the role of Chase is also a major part of the three strategies, with control being the goal of Chase.
Loan Syndication Management
As the principal underwriter, Chase gains full control of the project, financing, and can dictate terms to other participating banks. The bank is also getting fees at the underwriter and the syndicate levels of the transaction. As Chase underwrites loan commitment from other banks, it exposes its balance sheet to the risk of having to give up more than it expected in underwriting fees to secure commitment should there be a little demand from the other banks. The current arrangement gives Chase a spread of 30 bp. However, the bank also earns fees as a sub-underwriter after splitting fees with five other banks at the sub-underwriter level (Esty 18). As it receives the fees at two levels, Chase also incurs a management risk of ensuring that all partners honor their commitments, as well as handling any contingency plans that would arise. Circumstances such as the liquidity of the market can influence the cost of loans and the syndication closing fees that Chase incurs.
Esty, Benjamin C. “Chase’s strategy for syndicating the Hong Kong Disneyland Loan (A).” Harvard Business School (2003): 1-22. Print.
Po-lam, Paul Pong. “Finding high-return, low-risk investment opportunities.” Ejinsight, 2015. Web.