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    Walt Disney Yen Financing-Kelompok 1

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    michelleruthn
    1) The Walt Disney Company receives large and growing royalty payments in Japanese yen from Tokyo Disneyland. However, yen exchange rate fluctuations pose a risk as weaker yen means fewer dollars from conversions. 2) Goldman Sachs proposes issuing a euro-denominated bond that can be swapped into a yen liability, hedging Disney's currency risk. This involves a currency swap with a French utility and bank to convert cash flows. 3) Analysis finds the Goldman plan offers Disney a lower borrowing cost than a direct yen loan, while also benefiting the French utility and bank through interest rate differentials. Disney ultimately implements the plan despite critics questioning the hedge as yen strengthened.

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    Walt Disney Yen Financing-Kelompok 1

    Uploaded by

    michelleruthn
    29 views25 pages
    1) The Walt Disney Company receives large and growing royalty payments in Japanese yen from Tokyo Disneyland. However, yen exchange rate fluctuations pose a risk as weaker yen means fewer dollars from conversions. 2) Goldman Sachs proposes issuing a euro-denominated bond that can be swapped into a yen liability, hedging Disney's currency risk. This involves a currency swap with a French utility and bank to convert cash flows. 3) Analysis finds the Goldman plan offers Disney a lower borrowing cost than a direct yen loan, while also benefiting the French utility and bank through interest rate differentials. Disney ultimately implements the plan despite critics questioning the hedge as yen strengthened.

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    1) The Walt Disney Company receives large and growing royalty payments in Japanese yen from Tokyo Disneyland. However, yen exchange rate fluctuations pose a risk as weaker yen means fewer dollars from conversions. 2) Goldman Sachs proposes issuing a euro-denominated bond that can be swapped into a yen liability, hedging Disney's currency risk. This involves a currency swap with a French utility and bank to convert cash flows. 3) Analysis finds the Goldman plan offers Disney a lower borrowing cost than a direct yen loan, while also benefiting the French utility and bank through interest rate differentials. Disney ultimately implements the plan despite critics questioning the hedge as yen strengthened.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    29 views25 pages

    Walt Disney Yen Financing-Kelompok 1

    Uploaded by

    michelleruthn
    1) The Walt Disney Company receives large and growing royalty payments in Japanese yen from Tokyo Disneyland. However, yen exchange rate fluctuations pose a risk as weaker yen means fewer dollars from conversions. 2) Goldman Sachs proposes issuing a euro-denominated bond that can be swapped into a yen liability, hedging Disney's currency risk. This involves a currency swap with a French utility and bank to convert cash flows. 3) Analysis finds the Goldman plan offers Disney a lower borrowing cost than a direct yen loan, while also benefiting the French utility and bank through interest rate differentials. Disney ultimately implements the plan despite critics questioning the hedge as yen strengthened.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 25

    The Walt Disney Company’s Yen

    Financing
    Pembimbing : Dr. Alexander Suwinto Johan, S.E., M.M.

    Kelompok 1 :
    Angelica Joanna Charity Kamalo (117221041)
    Arya Adi Bramasta (117221042)
    Debora Eunike (117221044)
    Michelle Ruth Natalie (117221049)
    Walt Disney’s Relationship with Tokyo Disneyland

    ● Had been open for about many years


    ● Operated by separate company
    ● Sends royalty receipts to Walt Disney in ¥ (Yen)
    ○ → About ¥8 billions recently
    Problems facing Walt Disney

    ● ¥8 billions in royalty receipts received in current year


    ● Face exchange rate risk into dollars
    ● ¥ (Yen) has recently lost value against the dollar, so each ¥ (Yen) translates into fewer
    dollars when Walt Disney exchanges them
    ● Specifically, ¥229,78/$ to ¥248/$ in recent period
    ● Strong growth in royalty receipts (denominated in ¥ (Yen)) projected (10-20% per
    year)
    Disney’s Current
    Debt Load
    Possible Solution (1. Foreign Exchange Forwards)
    (+)
    ● Very common hedging instrument
    ● Can be executed at a fairly low cost for maturities extending 2 years
    (-)
    ● Longer maturities have higher costs (higher bid-ask spreads)
    ● Dealers don’t like making any transactions of any substantial size very far into the future
    ● Bank foreign exchange forwards would use up more of Disney’s already heavily-drawn
    bank credit lines, since the bank would treat the forward contracts as part of their overall
    exposure to Disney. This might inhibit Disney’s further use of letters of credit to back up its
    commercial paper.
    Possible Solution (2. Currency Futures & Options)

    (+)
    ● Futures contracts and put options on Yen are readily available

    (-)
    ● Standard future contracts and options tend to have maturities that are less than one
    year
    ● Options have premiums up front that must be paid
    ● Contract sizes are small relative to Disney’s annual exposure of ¥8 billion or more
    Possible Solutions (3. Balance Sheet Hedges)
    (+)
    ● Having a liability denominated in Yen would create a use for the Yen royalties (interest
    and/or principal payments)
    (-)
    ● Difficult to obtain such liabilities
    ● Domestic Yen Bonds - Foreign companies had difficult time issuing in Japan in 1980’s;
    also cumbersome process (1-3 months)
    ● Euroyen Bonds - Japanese Foreign Minister regulated the use of Yen in international
    finance transcations. Only AA or better companies could issue (Disney was rated A-)
    ● Conventional term yen loan - This one is possible (they already have one outstanding)
    Possible Solutions (4. Currency Swap into Yen)

    Using Existing Dollar Debt


    ● Problem - current dollar debt mature in 18 months and 44 months
    ● $50 million of the longer-maturity note had already been swapped into yeen
    Using New Debt
    ● This is what Goldman Sach offers them - a ECU-denominated bond (new debt) that can
    be swapped into a Yen liability
    ● The money raised through the new debt can be converted into dollars and used to pay
    down short-term debt
    Swab Mechanics
    Two Viable Options

    1. Yen Term Loan


    2. Currency Swap using New Debt

    Analysis Plan:

    - See what the cost is for each Debt Instrument


    - See which cost is cheaper
    - if the swap is cheaper, we’ll see how Disney benefits, how the Frendi Utility benefits
    and how the Sap bank benefits
    The Yen Term Loan
    (in the bottom of the page 4)

    ● ¥15 billions ten-year loan, with principal repaid at final maturity. Interest of 7,50% paid semi-annually
    and front-end fees of 0,75%
    ● “All-in cost for Disney borrowing in Yen:
    ○ Solve for YTM (Yield to Maturity) of a bond with the following features:
    ■ Par = 100
    ■ Price = 100 - 0,75
    ■ Coupon = 100*0,075/2 = 3,75
    ■ N = 10 x 2 = 20
    Rate = 3,804% x 2 = YTM = 7,608% (Bond Equivalent Yield);
    = (1,03804^2)-1 = 7,75% (Annual Equivalent)
    The Goldman Sachs Plan:

    New Debt (exhibit 6)


    - ECU 80 million, with sinking fund
    - 10 year Eurobonds @ 100,25% of par
    - 9,125% annual coupon
    - 2% underwriting fees
    - $75,000 additional fees
    Currency Swap:
    - Swap into a Yen Liability
    Goldman Plan

    What is the “all in” cost for Disney Borrowing in ECU (The Euro ECU bond - pays
    annually)?
    - Expenses: $75,000 X (ECU 1/$742) = ECU 101,078.17
    - Fees: 2.00% of par. So Price minus fees is 100.25% - 2.00% = 98.25%
    - (80 million ECUs) X (9825) - 101.078 + 78.499 million ECUs
    - Annual coupon payments: (80 mill) X (9.125) = 7.300 million ECUs
    - 10- year amortization
    - Sinking fund stats in year 6
    Disney Cash Flows

    IRR = 9.4727%

    Exhibit 6
    Interest Rate Differentials
    The Motivation for the French Utility

    ● Wants to swap them into ECU liabilities to match with its European currency
    receivables
    ● Rated AAA
    ● French Utility already has Yen Bonds on its balance sheet
    French Utility
    Cost of Debt

    Exhibit 8
    Interest Rate Differentials
    The Swap
    Exhibit 7
    Disney’s Benefit
    Exhibit 7

    The semi-annual IRR is 3,446%


    → this means that the swap is
    allowing Disney to borrow “in Yen”
    at a 6,89% Bond Equivalent Yield
    (APR) or 7,01% Annual Equivalent
    (EAR).
    French Utility’s Benefit
    Exhibit 7

    The French Utility had an existing loan →


    so it didn’t actually swap principal
    payments. The (14.445,153) is actually
    (14.591,73) based on a 6,83% EAR yield.
    This makes the 80.000 ECUs actually
    79,29 ECUs which results in an IRR for
    column C of 9,35%. This is slightly better
    than the 9,37% it could have borrowed
    ECUs at.
    Interest Rate Differentials
    Bank’s Benefit
    Exhibit 7
    Bank’s Benefit in ECUs (in millions)

    ● Year 0 → 0,005
    ● Year 1-6 → 0,05
    ● Year 7 → 0,04
    ● Year 8 → 0,03
    ● Year 9 → 0,02
    ● Year 10 → 0,01
    Outcome

    ● Disney did go ahead with the ECU Bond and the Swap into the Yen Liability
    ● The Yen actually rose over the next few years, prompting critics to second-guess
    Disney’s decision to hedge its yen royalty stream
    ● Disney remained firm in its decision to hedge its royalties and issued Swiss Franc and
    Australian Dollar notes, both swapped into Yen Liabilities

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