The Walt Disney Company’s Yen Financing

Prepared By – Nitin Gupta (A024)

Ayush Gupta (A025) Manica Gupta (A026)

paid in yen. with principal repaid at final maturity. operated entertainment and recreational complexes.7 billion. Walt Disney has two proposals. the director of finance at The Walt Disney Company. increased 6% to $1. and the Walt Disney World destination resort in Orlando.8 million in 1984. and sold consumer products. First. produced motion pictures and television features.50% paid semi-annually and front-end fees of 0.7 billion at the end of fiscal 1984. and Disney would take on a Yen liability in exchange for future ECU receipts. an increase of 5% from 1983. California.The Case Summary The Walt Disney Company. . The current spot rate of JPY/USD is 248. Second. 1983. In order to mitigate the foreign exchange fluctuation risk. In early July 1985. Florida. developed community real estate projects.70 is also a matter of concern. Consolidated revenues for The Walt Disney Company and its subsidiaries increased by almost 27% in 1984 to $1. 1984. including royalties from Tokyo Disneyland. intermediated by Industrial Bank of Japan (IBJ). a depreciation of almost 8% from the last year’s value of 229. Disney was considering a ¥15 billion ten year bullet loan. The company was founded in 1938 as a successor to the animated motion pictures’ business established by Walt and Roy Disney in 1923. owned and operated by an unrelated Japanese corporation. Total entertainment and recreation revenues.20%) in the years ahead. and Disney foresaw further growth (10% . Goldman Sachs proposed to arrange for Walt Disney and a French Utility to enter into a swap. The company operated the Disneyland amusement theme park in Anaheim. California.1 billion in the fiscal year ended September 30.75%. on certain revenues generated by Tokyo Disneyland. was concerned about possible foreign-exchange exposure due to Yen royalty receipts from Tokyo Disneyland which had increased during the last year significantly(¥8 billion). Tokyo Disneyland was opened to the public on April 15. Total assets grew 15% to $2. Net income totalled $97. in which the utility would take on an ECU liability in exchange for future Yen receipts. which required interest of 7. In addition to the domestic entertainment and recreation revenues from Disneyland and Walt Disney World. the company received royalties. a diversified international company headquartered in Burbank. Rolf Anderson.

and the proceeds could be used to pay off some of the short-term debt and diversify the maturity structure of Disney’s debt. how much should be hedged and over what time frame? A1. hedging comprehensively is the most optimal solution to cover future fluctuations in ¥/$. Therefore.Q1. Considering the long term trend. it will hurt Disney’s plan. There are basically two alternatives – 1) Create a YEN liability . Because the amount of money received in JPY is huge. As a result.753% (From Excel sheet-Bank Loan) .804% semi-annually (from Excel sheet Bank Loan) Annual all-in cost of the JPY Term Loan = (1+3. Disney needs USD for construction and expansion purposes but not much exposure to YEN cash flow. Given the fluctuation of YEN/USD rate. a depreciation of the JPY could deeply disrupt Disney’s financial plans. Disney needs to transfer YEN to USD. Should Disney hedge its yen royalty cash flow? Why or why not? If so.50% paid semiannually. All-in cost of this JPY Term loan: IRR = 3. if the appreciation of JPY is lower than expectation.15 billion ten-year bullet loan 2) SWAP solution offered by Goldman Sachs Alternative 1 JPY term Loan One of the viable choices was to create a Yen liability through a ten-year term loan of ¥15 billion from a Japanese bank with interest of 7. this is a big exposure which needs to be hedged. It could hedge the JPY royalties.80423%)2-1 = 7.

36% on the USD equivalent notional of 10 million at an initial exchange rate of USD/JPY 120. Disney tried to use SWAP to transfer the ECU liability to YEN liability with French Utility. SWAPs are popular and attractive. These firms could swap to take advantage of the lower rates. Using Exhibit 6 data from the Excel IRR=All-in Cost of the ECU Eurobond=9.Alternative 2 SWAP solution offered by Goldman Sachs ECU Eurobond Another alternative.2 billion and receive USD 5. because they can benefit both counterparts of the contract. A swap could benefit both firms if the firms in separate countries have comparative advantages on interest rates. or to speculate on changes in the underlying prices. Disney needed to SWAP the ECU liability into YEN liability to achieve the goal to hedge the expected future YEN receipts. suggested by Goldman Sachs. Swaps can be used to hedge certain risks such as interest rate risk. a swap is a derivative in which two counterparties agree to exchange one stream of cash flows against another stream. For example. . In finance. In this case.47% (Excel sheet Swap) ECU/YEN SWAP After issuing the Eurobond. In such a case the party pays/receives fixed interest in currency A to receive/pay fixed rate in currency B for a term of T years. is that Disney issue ten-year ECU80 million Eurobonds that would be swapped into a Yen liability at a potentially more attractive all-in Yen cost than a Yen term loan. you pay JPY 1.6% on a JPY notional of 1.

Long term JPY debt . we notice that the French Utility has an advantage in both currencies’ debt.37=17. it seems to be a good idea that Walt Disney and French Utility should involve in a SWAP to exchange their liability.47% 9. Foreign-currency swap (JPY/USD) .Disney has a comparative advantage. Liquid markets for options and futures contracts .12%). If Disney borrows in ECU and the French Utility borrows in JPY. Therefore. .Loan rates for comparative-advantage: JPY Loan 7.Existed only for maturities of two years or less 2. Assuming a hedge is desirable.Is short-term since Disney’s Euro dollar note issues matured in one to four years.37%B Walt Disney (rated A) French Utility (rated AAA) A – YTM of french Eurobonds in denominated currency of Yen of ten year maturity period(Exhibit 8) B .3%) than if Disney borrows in JPY and the French Utility borrows in ECU (7.YTM of french Eurobonds in denominated currency of ECU of ten year maturity period(Exhibit 8) From the table above. Attractive yen swap rates for maturities less than four years were hard to find 3. what hedging techniques are available to the treasurer and what are the advantages and disadvantages of each? A2.83%A ECU Loan 9.83=16. Q2.47+6. and the proceeds could be used to pay off some of the short-term debt and diversify the maturity structure of Disney’s debt 5. but Disney has a Comparative-Advantage in ECU. they pay less combined interest (9. SWAP solution offered by Goldman Sachs . The various hedging techniques available to Rolf Anderson are – 1. Longer maturity Eurodollar debt .Disney issued Eurodollar notes recently and also the company has high debt ratio at present 4.Hedge the JPY royalties.75+9.75% 6.

Also.S. it would translate lower dollars in the future and impact its debt serving capacity. As per the past trend. if Walt Disney does not hedge and Yen continues to depreciate. Disney had worldwide brand recognition. Moreover. because at that time Disney would be only the second U. While revenues are earned in Yen. it has to repay its debt in Dollars 4. . Its bonds would be the first ECU bonds incorporating an amortization schedule to repay the bond’s principal. Corporation to access the ECU Eurobond market. Walt Disney expects to earn higher revenues in future from Tokyo Disneyland 3.Therefore we can conclude that there are various advantages of hedging: 1. The trend from years 1980 to 1985 indicates that yen has been depreciating against the Dollar (Exhibit 4 in Excel) 2. the option of SWAP seems to be the best option available.