1: Introduction: Case (1/2) August 2000 Hong Kong International Theme Parks Ltd (HKTP):an entity jointly owned

byThe Walt Disney Company and the Hong Kong government HKTP awardedChase Manhattan Bank the mandate to lead a HK$3.3 bnbankfinancing for the construction of the HK$14 bnHKTP and resort complex 17 major banks invited to bid on deal Disney chose Chasebecause of its global leadership in syndicated finance andits firm commitment to underwrite the full loan amount Chaser responsible for raising the funds regardless of how the bank market reacted to the deal. 2: Introduction: Case (2/2) Chase HQs in NY, but HK office responsiblefor executing the deal Deliver a syndication thatmetboth thebank market s expectations forparticipation levels and credit quality , and thesponsor s desire for a rapidclosing with a supportive bank group Directconsequences on Chase s reputation as a leader in syndicatedfinance, its returns as an underwriter, and its credit exposure as a lender Alternatives: General Syndication 2-stage Syndication, with a sub-underwriting prior to prior to generalsyndication Decide: Banks to invite Allocation of fees and titles Loan to retain onB/S 3 Introduction: Hong Kong (1/2) 150 years as aBritish Colony In1997, HK became theHong Kong Special AdministrativeRegion(HKSAR) within the People s Republic of China Transfer of Sovereignty Agreement, China assured SAR a highdegree of autonomy under a one country, two systems concept Some concerns: political freedoms and civil rights, butpreservedBritish legal system and free market economy New govt. maintained low taxes, unrestricted capitalmovement, a stable HK$, and a duty free port. 4 Introduction: Hong Kong (2/2) One among the Asian Tigers Its prosperity ranked with large countries in Western Europe Economy: Based on services, tourism and international trade Few natural resources; relatively high labour costs Recession: Thai currency crisis 1997 Unemployment rate more than doubled GDP fell for the first time in 20 years Stock market crashed Tentative recovery by mid-1999 Decline in o/p remained a subject of public concern People on HK banking on a Disney theme park to create more jobs andend a slump in tourismIntroduction: Hong Kong (2/2) 5 Introduction: The Walt Disney Company (1/2) Inception in 1923 Multinational, multimedia entertainment giant Revenues > $20bn Debt rating: A AnnualOperating cash flow:

$5bn BusinessSegments:1.Theme Parks and Resorts2.Media Networks3.Studio Entertainment4.Consumer Products5.Internet/Direct Marketing 7 Theme parks (+4 in the works), 27 hotels with 36,888 rooms, 2 cruiseships, 728 Disney stores, 1 broadcast n/w, 10 TV stations, 9international Disney channels, 42 radio stations, 1 internet portal, 5major internet websites, interests in 9 US cable networks, and a librarycontaining thousands of animated and live films and TV episodes. 6: Introduction: The Walt Disney Company Theme Parks and Resorts segment Companyowned and operated the original Disneyland in Anaheim,California and the Walt Disney World resort complex inOrlando,Florida US and Tokyo parks successful Earnedf ees&royalties on Tokyo Disneyland(1983) and DisneylandParis(1992) Disneyland Paris experiencedf inancial problems due to: European recession Large initial capital expenditures Overly aggressive capital structure, dependent upon real estatesales for debt service (project debt = 75% of project value) To avoid bankruptcy, had to forgo some of its management andother fees; banks active in HK market restructured loans Importance of international growth: US gives 80% of its revenues,has only 5% of world population 7 Introduction: Hong Kong Disneyland (1/5) In December1999, Disney and the HK Govt. signed a comprehensiveagreementfor a new theme park and resort complex to be located on thenortheasternend of LantauIsland. According to the agreement, the project would have3phases: Phase I would include a Disneyland-style park with several themed lands featuring Disney rides and attractions, as well as one or two hotels and aretail, dining, and entertainment complex. Phases II and III were less well defined, but included options to developadjoining sites at some point in the future. Development strategy: Learning from our experience with Disneyland Paris [a deal that experienced financial problemsshortly after opening] , the strategy for Hong Kong was tostart small and then toadd capacity over time as demand grew. In fact, Phase I included plans to double capacity within the first ten years of operations. The real keys to success are having the land available for growthand the ability to finance this growth out of operating cash flow. 8 Introduction: Hong Kong Disneyland (2/5) Because most of the construction site was currently ocean, thesponsors had to reclaim land. The HK Govt. agreed to pay for land reclamation and infrastructuredevelopment at a cost of HK $14 billion. According to the target dates, land reclamation would begin at theend of 2000, resort construction would begin in 2002, and the parkwould open for business in 2005. The Government supported the project because it expected thepark to generatesizable public benef its. One local economist estimated that land reclamation andconstruction would generate 16,000 new jobs, while the resortwould generate 18,000 jobs at opening and up to 36,000 jobswithin ten years.

9 Introduction: Hong Kong Disneyland (3/5) A new corporation,HongkongInternational Theme ParksLimited (HKTP), was created to construct,own, operate, andfinance the project. It planned to raise the HK $14 billion construction cost from4 sources: This sum does not include an additional $14 billion of landvalue and associated infrastructure development contributedby the HK Govt. 10 Introduction: Hong Kong Disneyland (4/5) The HK Govt. and Disney agreed to provideequity shares of HK $3.25billion (57% share) and HK $2.45 billion (43% share), respectively. In addition, the HK Govt. agreed to provide HK $6.1 billion of su bordinated debt with a 25-year maturity and repayments starting 11years after opening day. This left ashortf all of HK $2.3 billion (16% of total capital), which the HKGovt. hoped to fill with some kind of external finance. Inclusion of private sectorf inancing would not only show that the projectwas viable in the eyes of the international banking community, but wouldalso provide independent oversight of construction as well as monitoringof ongoing operations. Eventually, HKTP decided to raise HK $2.3 billion through a 15-year,non-recourse term loan for construction and HK $1.0 billion in a 15-year,non-recourse revolving creditf acilityfor postconstruction working capitalneeds. 11 Introduction: Hong Kong Disneyland (5/5) until aftertheland r Because HKTP did not need significant construction funds

eclamation was complete, it had theoption of waiting until 2002 before raising the bank debt. By waiting, it could delay paying thecommitmentf ees charged bythe banks. Although it had two years in which to place the commercial loan,the Asian loan market was showing signs of recovery by early 2000.Knowing the structuring and syndication process could take six tonine months, it decided tostart the process sooner rather than later. Itsf ear, given the recentvolatility in the Asian banking market, wasthat if it waited until 2002, it might not be able to get a loan, nevermind a loan with attractive pricing. 12 Winning the Mandate Disney DealTeamfor HK$3.3 bnfinancing: VP, Corporate Finance and assistant treasurer Director, Corporate Finance Manager, Corporate Finance Senior Analyst, Corporate Finance VP and Counsel Developed aTermSheet for bank financing and contacted company srelationship banks and other banks expert in HK syndicated loan market Discussions: Get preliminary expression of interest and assessment of current conditions in HK bank market Disney explained: wanted to raise HK$3.3 bnnon-recourse loan packageon a fully underwritten basis and expected to scale up to 3 lead arrangersfor the transaction. 13

Introduction: Chase ManhattanBank (1/2) It was highly predictable that Disney would contact Chase ManhattanBank. One of Disney s top 10 relationship banks Chase was the third largest bank in the U.S. (> $400 bnassets and $175 bnloans in 1999) A leader in the field of syndicated finance. In 1999, lead arranger for 34%of total syndicated loans by dollar volume in the US (nearest competitor:21%) Dominant in US market for loans greater than $1bn; led 47.5% of deals, 3times more than the nearest competitor The financial press had recognized Chase s leadership with numerousawards: Best Loan House of the Last 25 Years 1974-1999 (International Finance Review) Best at U.S. Syndicated Loans 1999 (E uromoney) Best Project Finance Arranger in the U.S. 1999 (Project Finance) 14 Introduction: Chase ManhattanBank (2/2) Not the market leader in all loan types or all locations but aformidable competitor in most markets, including Asia Over 400 professionals in its Global Syndicated Finance Group withoffices in London, NY, HK, Tokyo and Sydney Each office had structuring and distribution teams The largest syndicated lending platform in the Asia Pacific region More people and greater coverage, so able to do the largest andmost difficult deals 15 Making the Short List (1/2) 3 ways to approach a deal: bid aggressively to win bid less aggressively without fear of losing no bid Although Disney was an important global client, the deal did not seemthat attractive to Chase initially. It had a long tenor (15 years) which banksdon t like, it had to contend with the problems at Disneyland Paris, thesponsors wanted to mandate as many as 3lead arrangers which hurts itseconomics, and its competitors, especially the local banks likeBank of China and Hong Kong ShanghaiBanking Corporation (HSBC), were likely tobid aggressively And so, itdecided to bid less aggressively withoutf ear of losing. Yet toprotect its reputation, it wanted to bid aggressively enough to make theshort list for this high-profile deal. If it happened to win the mandate, itwould have to be on terms that met our earnings thresholds 16 Making the Short List (2/2) Disney Finance Team met Chase and 16 other banks in HK toreview: Key loan terms including the pricing (an unknown) Amount (HK$3.3 bn) Maturity (15 years) Covenants Chase team emphasized itsf lexibilityon key strategic terms, itscredentials as a leading syndication bank and itsknowledgeof andrelationship with the local market. ForPricing, Chase indicated that it needed an underwriting fee of between 100 bpand 150 bp, and that the market would probably requireinterest rate spreads of 135 to 150 bpover HIBOR to accept the deal. Although Chase expected ultimately to bid to lose, it agreed that the dealwould be muchmore attractive if Disney chose to award a sole leadarranger mandate. Disneyshortlisted5banks for the mandate and asked them tosubmit f inal proposal: Chase, HSBC,Bank of China, ABN Amro, CitiBank, and FujiBank.

17 Preparing the Final Proposal (1/8) Chase had toassess: Loan s credit risk Decide whether to underwrite the full amount Commit to an underwriting fee and interest rate spread Develop a preliminary syndication strategy Chase came up with somecreativef eatures to improve the chancesof winning: For example, they suggestedsplitting the revolving creditf acility intotwo parts, a HK $250 million portion that would be available forconstruction cost overruns and a HK $750 million portion that wouldnot be available until construction was completed. While the available portion would carry a market basedcommitment fee of 37.5 basis points per annum, the unavailableportion would carry a discounted fee of 15 basis points per annum.Such leeway was possible given the loan s seniority and modest sizerelative to HKTP 18 Preparing the Final Proposal (2/8) CreditIssues: Disney s Term Sheet contained aggressive elements, particularly the15-year final maturity and a provision that allowed repayments tostart as late as three years after opening. Chase expected market to beleery of 15-years tenor as most bank loans were fully repayable in 3-5years Disney s desire to use operating cash flows for expansion (capitalexpenditures) Its unwillingness to subordinate management fees and royalties Borrower s principal asset (fallback collateral) was oceanfront land,which would not exist for nearly 2 years. Stress testing the financial implications, Chase decided these creditissues were adequatelymitigated bythe borrower s conservativecapital structure and the govt. s commitment to the project. Chase resolved to show max.f lexibility (align its proposal toDisney s request), include covenants requiring min. DSCR 19 Preparing the Final Proposal (3/8) Issue:Commitment to underwrite thef ull amount Exposed the bank to greater risk; sought senior mgmt. approval This proposal would: show Chase s support for the client, signal its confidence in the deal, and provide greater profit for the firm. It might also set Chase apart from other banks that were unwilling tounderwrite the deal and increase the probability of winning a sole mandate deal Internal approval process centredon deciding: Credit exposure chase wanted to hold on its books after generalsyndication Diff erentiatesb/w underwriting risk and credit risk As a lead arranger, Chasegeneral policy was to hold 10% of the loan(% declined as loan size or risk increased) Chase decided to hold af inal position of HK$300 mn, slightly < 10%,was appropriate given the 15-year maturity 20 Preparing the Final Proposal (4/8)Pricing: Standard procedure: benchmarking Careful analysis reqd. as no two loans were exactly alike, esp. project loans Chase proposed: Initially, the spread would be 100 basis points over HIBOR, stepping up to 125basis points in year six, and to 137.5 basis points in year 11. Step-up pricing, a common feature on project loans, appeals to borrowerswho want lower s total capital.

expenses in the early years and who plan to refinance beforethe step-ups take effect. It also appeals to lenders, who view the increases ascompensation for longer maturities and greater future uncertainty. w.r.t.underwritingf ee, they thought a no. b/w 100-150 bpwas appropriate Its fee might be on the high end, but it didn t feel bad about this for 2reasons: It was not afraid to lose this deal on up-front pricing it cared about dealquality and profitability, not deal volume. Second, if properly marketed, borrowers viewed the up-front fees in terms of their annual cost, not the nominal first-year cost. 21 Preparing the Final Proposal (5/8)SyndicationProcess:Option# 1: lead a Chase would be thesole mandated

rranger Would invite 4 banks to act assub-underwriters with lead arranger titlesin exchange for commitments of HK$660 mn Thef inal allocations in the general syndication for the reqd. total of $3.3bnwould be: Chase and the 4 lead arrangers at HK$300 mneach 4 arrangers at HK$250 mneach 4 co-arrangers at HK$150 mneach and 2 lead managers at HK$100 mn Advantages: Administrative simplicity: Disney to deal with only 1 lead bank Reduced underwriting risk for Chase Possibly easier syndication given the sub-underwriter support 22 Preparing the Final Proposal (6/8)SyndicationProcess:Option#2: Chase and 2 other banks would share ajoint mandate and a joint underwritingcommitment, but they would skip the subunderwritingphase The mandated banks (coordinating arrangers) would each underwriteHK$1.1 bnof the total amount and split the underwriting fee 3 ways Thef inal allocations in the general syndication would be: Chase and the 2 other mandated banks at HK$300 mneach 4 arrangers at HK$250 mneach 6 co-arrangers at HK$150 mneach 5 lead managers at HK$100 mn This strategy required only 2 additional underwriting commitmentsinstead of 4 prior to the general syndication, but it meant sharing leaguetable status as well as giving up two-thirds of the underwriting fee. 23 Preparing the Final Proposal (7/8)SyndicationProcess:Option# 3:(not presented to Disney) Combination of the first 2 options Chase would be the sole mandated bank and it would proceeddirectly to the general syndication where thef inal allocations would be: Chase at HK$300 mn 4 arrangers at HK$250 mneach 8 co-arrangers at HK$150 mneach 5 lead managers at HK$100 mn Relative to the other 2 strategies this strategy would: improve Chase s compensation and league table status , but would expose it to the greatest amount of credit and syndicationrisk, and would result in the largest syndicated as measured by the no. of participating banks. 24 Preparing the Final Proposal (8/8) The key to success in this business is being close to the market. Thismeans being in touch with banks on a weekly, if not daily, basis. Started with a universe of approx

90 banks and created atarget lender list that might be interested in this deal. Then partitioned the target list intocommitment size categories and assigned participation probabilities for each category. This process gave it asense of liquidity and an indication of whether the deal will clear the market. Based on its analysis for the Disney deal, they expected it would beoversubscribed by 57%. This kind of analysis illustrated its closenessto the market and its confidence in the deal. 25 Arranging the Loan (1/) Disney chose Chase because: its pricing was competitive, it agreed to underwrite the full amount, and they showed a high degree of flexibility on structuring, particularly theirwillingness to permit ongoing capital expenditures without burdensomecovenants. Having won the sole mandate, Chase met with Disney to negotiate acommitment letter with final terms, discuss the syndication strategy, andmap out a syndication timetable. As with any legal document, the contentof a formal commitment letter invariably required negotiation. Fromexperience, Chase knew itsstandard marketf lex provision was likely tobeone source of contention. The marketf lex clause that was presented to Disney read: Chase shall be entitled, after consultation with Disney and the Borrower,to change the structure, terms, amount, or pricing of the Facility if thesyndication has not been completed due to a change in the Hong KongDollar market and if Chase determines, after consultation with Disney and the Borrower, that such changes are advisable to ensure a successful syndication of the Facility. 26 Arranging the Loan (2/) Althoughborrowers disliked the provision, its inclusion wasargued, particularly in the volatile Asian market: Chase was the pioneer in the use of market flex terms. It makes good business sense to include this clause, even though our competitorssometimes use it against us in competitive mandates, because thingscan change between the time you sign a deal and the time you try toclose it. Unlike the material adverse effect (MAE ) or material adversechange (MAC) clauses, which allow us to pull a commitment, themarket flex provision is not an out . Instead, it provides room tomaneuver, to adjust key terms as with a bond issue. But to date,Chase had never invoked the market flex clause in Asia.Nor did it invoke the MAC clause, even during the Asian financial crisisof 1997-1999, and it told this to clients. 27 Arranging the Loan (3/) After agreement on the final terms and commitment letter signed, Chasehad toselect a syndication strategy. Because Chase had committed to a fully underwritten deal, thesyndication strategy was technically their decision alone. However, forrelationship reasons, Chase knew it was important toaccommodate Disney s priorities as much as possible, and these favoureda sub-underwriting approach. Disney requested that some of the short-list banks and some other strongbanks that did not participate in the bidding have senior status. Disneyalso wanted to keep the final bank group down to a manageable size. Syndicate structuringTrade-off: Large syndicate generates more competition for the deal and often results inbetter execution but asks for sharing of

confidential information with morepeople. Also, it s harder to reach agreement with a larger group of banks. Lead banks hold larger shares was desired. 28 Arranging the Loan (4/) Chase to Decide: Whether to pursue a sub-underwriting; whom to invite as potentialsub-underwriters Should they target local banks for participation They didn t want the syndicate to get too big and let thecommitments get too small; they did want to give interested banksa chance to participate Participation by HK banks, particularly at the sub-underwriter level,would bring greater political support for the deal and send strongersignals for the deal and send stronger signals to foreign and smallerlocal banks about deal quality. Also easier to fund a HK dollar loan given their ability to raise HKdollar deposits (i.e. to eliminate currency risks). 29 Arranging the Loan (5/) Chase takes its relationships with investor banks veryseriously. It doesn t simply view them as stuffee banks, butrather partner investors with whom a closerelationship built on trust is critical. While it could often keep a larger slice of the pie, itdidn t want to expend any goodwill with our investorsby leaving them with the impression that it had gougedthem on fees or denied them an opportunity to acquirea meaningful earning asset. 30 Case: PartB(1/) Chase opted for sub-underwriting strategy for HK$3.3 billionfinancing It invited seven banks to make underwriting commitments of HK$600 million in return of lead arranger titles and sub-underwriting fee of 25bp Though Chase announced its merger with J.P. Morgan, six banksagrees to participate at HK$600million each, thus forcing it to scaleback their exposures to HK$471 million each Though the general syndication, it hoped to reduce the sub-underwriters commitments to final hold positions of HK$300million or less 31 Case: PartB(2/) Chase launched general syndication and invited 67 banks with threedifferent levels of participation Arranger tier for commitments of HK$250 million, up-front fee of 70bp Co-arranger tier for commitments of HK$150million, up-front fee of 60bp Lead manager tier, between HK$75 million and HK$100 million, fee of 50bp Commitments had to be pro rata for HK$2.3 billion constructionterm loan and HK$1 billion revolving credit facility, to be received byOctober 25th It had rights to close the syndication early if it received sizeablecommitments quickly 32 Case: PartB(3/) General Syndication was success as it generated commitmentstotaling HK$5.3 billion from 25 banks Considering the HK$4.2 billion in commitments from seven sub-underwriters, Chase

had approved commitments totalingHK$9.5billion, which was an over-subscription of close to threetimes