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Journal of Applied Corporate Finance
14 . 3
V O L U M E

Structuring Loan Syndicates: A Case Study

of the Hong Kong Disneyland Project Loan

Harvard Business School

by Benjamin C. Esty,
2 0 01
F A L L

STRUCTURING LOAN
SYNDICATES: A CASE
STUDY OF THE HONG
KONG DISNEYLAND
PROJECT LOAN
We are investment bankers, not commercial bankers, which means that we
underwrite to distribute, not to put a loan on our balance sheet.
—Matt Harris, Managing Director, Chase Securities
n 2000, Hongkong International Theme
I Parks Limited (HKTP), an entity jointly
owned by The Walt Disney Company
and the Hong Kong Government, began
the process of raising HK $3.3 billion (approximately
US $425 million) in the syndicated loan market to
finance part of the construction and operation of its
Hong Kong Disneyland theme park and resort
complex. Syndicated loans involve two or more
bank lenders united by a single set of legal docu-
ments for the purpose of providing credit to a
borrower. In the case of HKTP, 32 banks participated
in the syndicate and the deal was heavily oversub-
scribed. In this article, I discuss how Disney, acting
on behalf of HKTP, awarded the mandate to lead the
financing to Chase Manhattan Bank1 as well as the
bank’s strategy for pricing and syndicating the loan
among participating banks. Although I analyze a
single transaction, it is representative of what hap-
pens in the global syndicated loan market, particu-
larly the process Disney and Chase went through to
raise the funds and the decision points they faced
along the way.
The volume of global syndicated loans in-
creased from US $413 billion in 1990 to US $2.195
*Acknowledgments. I would like to thank Michael Kane for assistance with
this article and for co-authoring the original case studies: “Chase’s Strategy for
Syndicating the Hong Kong Disneyland Loan (A & B)” and the accompanying
teaching note (Harvard Business School cases #201-072, #201-086, and #5-201-
087). Disney’s Jeff Speed, Jon Headley, and Suet Lai, and J.P. Morgan Chase & Co.’s
Matt Harris, Mike McGovern, and Vivek Chandiramani provided valuable insight
on the original case studies. In spite of their assistance with the case study, neither
Disney nor Chase are responsible for the content or opinions expressed in this
article. The interpretations and analysis of case facts are mine alone. Finally, the
80
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by Benjamin C. Esty,
Harvard Business School*
trillion in 2000, making it not only the largest source
of corporate funds in the world, but also one of the
fastest growing. Yet despite the size of this market
and its importance as a source of corporate funds,
there has been relatively little research on syndicated
lending or the intricacy underlying these deals. Most
previous academic research into debt policy has
focused on such topics as determining an optimal
capital structure, choosing between private bank
debt (or private placements) and public bonds, or
selecting among various loan features such as short
vs. long term, fixed vs. floating rate, and cash pay vs.
zero coupon debt.2 Through this case study of the
HKTP financing, I hope to move beyond the overly
simplistic, albeit theoretically tractable, models of
debt choice favored by academics and begin to
explore the dynamics and consequences of various
real-world debt structures. Rather than focusing on
the credit analysis or documentation issues, I focus
on structuring and distribution because they are less
well understood and because they provide interest-
ing insights into debt management. Before getting
into the syndication process and strategy, I provide
a brief introduction to the terminology and econom-
ics of syndicated lending.
Division of Research at Harvard Business School provided financial support for this
research.
1. At the time, Chase Manhattan and J.P. Morgan had not yet agreed to merge.
They subsequently announced the merger on September 13, 2000, which
eventually created J.P. Morgan Chase & Co.
2. See M. Barclay and C. Smith, “The Capital Structure Puzzle: Another Look
at the Evidence,” Journal of Applied Corporate Finance, Vol. 12, No. 1 (Spring 1999)
and “On Financial Architecture: Leverage, Maturity, and Priority,” Journal of
Applied Corporate Finance, Vol. 8, No. 4 (Winter 1996).

BACKGROUND ON SYNDICATED BANK
LENDING
Before delving into the details of the Hong Kong
Disneyland financing, it is important to understand
the generic process of loan syndication, acquire
some basic terminology that will be used in the rest
of the article, and describe the compensation of
participating banks.3 As mentioned above, syndica-
tion joins two or more banks under a common set of
legal documents. The obligations are several in
nature; individual banks are not responsible for
other banks’ obligations. Nor are commitment
amounts necessarily equal across participating banks;
instead, banks share funding, repayment, and cer-
tain fees on a pro rata basis according to their original
level of participation.
Banks participate in the syndicated loan market
for different reasons. Arranging banks, which are
typically more interested in generating fee income,
seek to structure and lead transactions. Participating
banks, those interested primarily in generating loan
assets while staying within regulatory constraints on
leverage and loan size, seek to diversify credit
exposures to particular borrowers, industries, or
countries as well as to make loans in markets where
they lack origination capabilities. As one can see
from this description, there are important differences
between arranging banks and participating banks in
a syndicated loan financing; this article focuses
mainly on the arranging banks and their role in
structuring transactions.
The syndication process itself consists of the
following sequential events, and can take as little as
one month in the case of an acquisition loan or as
long as nine months in the case of certain structured
loans such as a project financing. First, a prospective
borrower selects a lead arranger to advise and
manage the syndication process. In most cases, this
mandate is awarded based on competitive bidding
among the borrower’s principal relationship banks
or other banks with relevant expertise. At times,
borrowers request that more than one bank share the
lead mandate (sole vs. joint mandates) to maximize
the chance of a successful syndication or to reward
several banks with lead status and higher compen-
sation. The lead arranger is responsible for negoti-
3. For a detailed overview of syndicated lending, see T. Rhodes, “Syndicated
Lending: Practice and Documentation,” (London: Euromoney Books, 2000, 3rd
edition).
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ating key terms and covenants with the borrower, in
addition to analyzing credit quality—although each
bank participating in the syndication is ultimately
responsible for its own credit analysis and review of
documentation.
When funding certainty is critical, borrowers
often request fully underwritten bids, meaning that
the lead arranger(s) must commit to provide the full
amount of the loan on specific terms and pricing. The
alternative is a best efforts bid in which the lead
arranger agrees to underwrite some portion of the
loan—typically the amount it is prepared to hold on
its own balance sheet—and attempts to place the
remainder in the bank market. The associated risks
and returns are very different in these two kinds of
deals. In a best efforts financing, also known as an
arrangement, the borrower takes the risk that the
market does not accept the deal and that it might
have to pay higher fees or spreads to entice greater
bank participation. In an underwritten deal, the lead
arranger (also known as the underwriter) takes the
risk that the market does not accept the deal and that
it might have to book the entire loan amount.
Although underwritten deals can be funded more
quickly, the underwriting fee is generally higher to
compensate the underwriter for greater credit and
syndication risks. In practice, approximately 70% of
deals are done on an underwritten basis. For “new
money” deals— those that provide borrowers with
new financing rather than refinance an existing
loan—the rate is closer to 90%.
After awarding the mandate, the borrower and
lead arranger execute a commitment letter that
confirms key terms, duties, and compensation. The
lead arranger then engages legal counsel to prepare
an initial draft of the loan documentation. At this
point, the lead arranger and borrower usually agree
on one of two basic syndication strategies: a single-
stage general syndication or a two-stage syndication
with sub-underwriting. In a deal with sub-under-
writing, the lead arranger and a small group of banks
underwrite the full amount before offering shares to
a broader group of banks. One can think of the sub-
underwriting as an optional, “wholesale” phase of
syndication and the general syndication as the
“retail” phase. The general syndication serves to
distribute the loan to a bank group that is large
FALL 2001

enough to commit the desired amount but not so
large that it becomes unwieldy. A supportive and
cooperative bank group facilitates making changes
to loan documentation when necessary, as when
exceptions arise, which they almost invariably do
during the life of a loan, or because financial
problems create a need to restructure the loan.
Prior to general syndication, the lead arranger
structures the syndicate in tiers according to commit-
ment amounts, sets closing fees for each tier, and
identifies which banks to invite to participate. Banks
in each tier of the syndicate have titles based on their
commitment amount. The most common titles are,
in descending order of amount: Mandated Arranger,
Lead Arranger, Arranger, Co-Arranger, Lead Man-
ager, and Manager. The banks invited to participate
are not necessarily the borrower’s relationship banks,
but rather banks with syndication relationships with
the lead arranger. The lead arranger prepares and
sends an “information memorandum” containing a
detailed description of the borrower and the trans-
action to each bank. The lead arranger then holds a
bank meeting to address questions about the deal,
announce closing fees, and establish a timetable for
commitments and closing. Invited banks are free to
make commitments for any tier offered. The size of
a bank’s commitment is a matter of internal policy
and varies based on factors such as the size of the
bank, its internal credit policies on exposure to the
particular client, country, or industry, and specific
loan terms.
If the total commitments received equal the
amount desired, the deal is said to be fully sub-
scribed; if they exceed or fail to reach the target
amount, the deal is said to be oversubscribed or
undersubscribed, respectively. In either case, the
lead arranger, often in consultation with the bor-
rower, determines the final allocations. The commit-
ments are based on credit approvals by each bank,
and as such, the lead arranger cannot increase the
amounts. However, the lead arranger has the right to
scale back commitments at its discretion. Following
closing, banks can and often do sell their positions.
Such trading in the secondary market for bank loans
is becoming more common as the pool of available
loans grows over time.
Most large banks have a syndicated finance
group that specializes in these deals. The syndicated
finance group performs two key functions: structur-
ing, which involves designing and negotiating deals
with borrowers, and distribution, which involves
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marketing deals to other banks. The two functions
must be closely coordinated because the deal that is
presented to the borrower (structuring) has to reflect
terms that are acceptable to the market (distribution).
The competition among banks to lead syndi-
cated financings has prompted several financial
publications to compile rankings, commonly re-
ferred to as league tables, to track leadership in the
field. The market assigns the most importance to the
Lead Arranger and Bookrunner titles. Usually the
lead arranger also takes the bookrunner title, a title
that refers to the activities in the later stages of the
syndication process such as managing the prospec-
tive lenders through the credit approval process,
setting the closing fees, and making the final alloca-
tions. These titles appear prominently on the cover
of the information memorandum, in the financial
press “tombstones” after closing, and in the lucite
deal mementos that each lender receives. In addition
to tracking arranger status (volume or number of
deals arranged), league tables also track provider
status (dollars lent).
Lender compensation comes in three forms.
When the loan documents are signed, lenders re-
ceive closing fees—also known as up-front or par-
ticipation fees—to compensate them for the work
involved in due diligence and credit approval.
Closing fees typically range from 20 to 200 basis
points, with larger and/or riskier transactions com-
manding higher fees. Generally, project finance
deals have higher closing fees than other loan types
because they require more credit analysis and in-
volve riskier positions given the non-recourse nature
of the loans. After closing, borrowers pay commit-
ment fees on any loan amount that is committed, but
unborrowed, plus interest on the amount that is
borrowed. Bankers refer to these loan amounts as
the undrawn and drawn amounts, respectively.
Commitment fees are typically 50 basis points or less
per year. The loan’s interest rate, at least for U.S.
dollar loans, is usually set in terms of a spread over
published inter-bank rates such as six-month LIBOR
(London Inter-Bank Offered Rate). For loans de-
nominated in other currencies, bankers sometimes
use local interest rates. For example, Hong Kong
dollar loans are often based on the Hong Kong Inter-
Bank Offered Rate (HIBOR). In either case, the
interest rate varies over time as the benchmark rate
changes, even though the spread typically remains
constant. Usually, one bank acts as the administra-
tive agent for the syndicate, keeping track of borrow-

The volume of global syndicated loans increased from US $413 billion in 1990 to US
$2.195 trillion in 2000, making it not only the largest source of corporate funds in
the world but also one of the fastest growing.
ings and repayments as well as serving as the
clearinghouse for interim cash flows. While the bank
acting as the administrative agent can be one of the
lead arrangers, it does not have to be one of them.
Arranging banks also receive compensation for
structuring deals. In a best efforts deal, the borrower
pays the lead arranger an arrangement fee for its
services. At a minimum, banks charge approximately
$100,000 to arrange a deal, though the average fee
is more like $500,000. For larger and/or more
complex deals, banks charge even more. In an
underwritten deal, the borrower pays a single under-
writing fee to the lead arranger/underwriter, which
then retains some portion as compensation for its
services and uses the rest as closing fees for banks
participating in the syndication. The retained under-
writing fee is usually quite substantial in relation to
the underwriter’s ultimate exposure as a lender in the
deal. If the deal involves a sub-underwriting phase,
the underwriter keeps a portion of the fee and shares
the rest with the sub-underwriters; the sub-under-
writers, in turn, keep a portion of their fee (the sub-
underwriter fee) and use the rest to compensate
participating banks with closing fees.
Table 1 describes the calculation of deal fees for
a sole-mandated loan with sub-underwriting. The
example assumes a loan of HK $3.3 billion (the size
of the Hong Kong Disneyland loan) and is based on
an underwriting fee of 125 basis points as well as a
sub-underwriting fee of 25 basis points and top-tier
closing fees of 70 basis points. (These are not the
actual fees, which were not disclosed to protect
confidentiality.) With these assumptions, total fees
are based on the underwriting fee and equal HK
$41.25 million (HK $3.3 billion × 125bp). If Chase is
the sole-mandated lead arranger and there is a group
of four sub-underwriters, the fees are broken down
as follows. Participating banks receive 50 basis
points for Lead Manager commitments of HK $100
million, 60 basis points for Co-Arranger commit-
ments of HK $150 million, and 70 basis points for
“top-tier” Arranger commitments of HK $250 million
or more. The sub-underwriters, including Chase,
receive closing fees of 70 basis points on their final
hold positions plus underwriting fees of 25 basis
points on the amount they underwrite (five banks
each underwrite HK $660 million for a total of HK
$3.3 billion). Chase keeps the difference between
4. The value of staged commitment in the context of venture capital
organizations is illustrated in W. Sahlman, “Aspects of Financial Contracting in
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the underwriting fee charged to the borrower and
what is paid to the sub-underwriters. In this case, the
difference is 30 basis points (125bp underwriting fee
– 25bp sub-underwriter fee – 70bp closing fee) on
the entire HK $3.3 billion.
The most complicated part of the compensation
scheme is the calculation of “pool” income, even
though it usually represents a relatively small fraction
of total fees. The HK $1.0 million of pool income in
this example represents the difference between fees
available to pay participating banks, assuming all
banks receive top-tier closing fees of 70 basis points
(HK $23.1 million), and the actual fees paid to
participating banks, which range from 50 basis
points to 70 basis points (totaling HK $22.1 million).
For example, the 20 basis point difference between
the top-tier closing fee of 70 basis points and the 50
basis points actually paid to Lead Managers ac-
crues to the pool and is split evenly among the
sub-underwriters. By adjusting the fee levels and
commitment amounts, the sub-underwriters try to
attract enough banks to participate so that the loan
clears the market. With this description as back-
ground, I now turn to the actual events surround-
ing the syndication of the Hong Kong Disneyland
project loan.
THE HONG KONG DISNEYLAND PROJECT
LOAN
In December 1999, Disney and the Hong Kong
Government signed a comprehensive agreement for
a new theme park and resort complex to be located
on the northeastern end of Lantau Island. According
to the agreement, the project would have three
phases. 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
a retail, dining, and entertainment complex. Phases
II and III were less well defined, but included options
to develop adjoining sites at some point in the
future.4 Jon Headley, Disney’s Director of Corporate
Finance, described the development strategy this way:
Learning from our experience with Disneyland
Paris [a deal that experienced financial problems
shortly after opening], the strategy for Hong Kong
was to start small and then to add capacity over time
Venture Capital,” Journal of Applied Corporate Finance, Vol. 1 (1988). The same
benefits sometimes apply to large projects.
FALL 2001
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TABLE 1 CALCULATION OF FEES FOR A SOLE-MANDATED LOAN WITH SUB-UNDERWRITING

Loan Amount ($HK millions) = $3,300 Mandate = Sole

Underwriting Fee (Assumed) = 1.25% Sub-Underwriting = Yes
Sub-Underwriting Fee = 0.25% $HK/$US Exchange Rate = 7.80
Top-Tier Closing Fee = 0.70% Total Underwriting Fees ($HK millions) = $41.25

Initial UW Sub UW General Syndication

Commit Total Invitation Total Percent Final Total Alloc/
No. of Amount Commit Alloc Amount Commit Scaled Alloc Alloc Bank
Banks (HKM) (HKM) (HKM) (HKM) (HKM) Back (HKM) (HKM) (USM)

Chase 1 $3,300 $3,300 $660 $660 54.5% $300.0 $300 $38.5

No. Other Mandated Banks 0 $0 $0 $0 $0 0.0% $0.0 $0 $0.0
Lead Arrangers (Sub UW) 4 $2,640 $2,640 54.5% $300.0 $1,200 $38.5
Arrangers 4 $250 $1,000 0.0% $250.0 $1,000 $32.1
Co-Arrangers 4 $150 $600 0.0% $150.0 $600 $19.2
Lead Managers 2 $100 $200 0.0% $100.0 $200 $12.8
TOTAL 15 $3,300 $3,300 $5,100 $3,300

CALCULATION OF FINAL HOLD POSITIONS

HKM = Millions of Hong Kong dollars; USM = Millions of US dollars; UW = Underwriting.
Number of Banks: Describes the number of banks at each syndicate tier. Chase, as the mandated Lead Arranger, has agreed to fully underwrite the HK $3.3 billion
loan. In this scenario, there are four other banks with Lead Arranger titles with approved sub-underwriting commitments (see below). The Arrangers, Co-Arrangers,
and Lead Managers represent three descending levels of participation amounts in the general syndication.
Initial Underwriting: First stage of the syndication. Commitments held by the bank(s) initially responsible for underwriting the loan. Here, Chase underwrites
the full loan amount.
Sub-Underwriting (optional): An intermediate stage of syndication in which the sole underwriter(s) subdivides the full underwriting amount among a small group
of banks. The four Lead Arrangers each agree to sub-underwrite $660 million. The exhibit shows Chase’s sub-underwriting commitment, and the total amount committed
by all of the Lead Arrangers collectively.
General Syndication: The final stage in which the underwriter(s) obtains commitments from additional banks in order to reduce the sub-underwriting exposures
to final hold positions. The columns show, in order from left to right:
• Invitation Amount per bank: Chase invites the general syndication banks to offer loan commitments in defined ranges, from a maximum of HK $250 million
down to a minimum of HK $100 million. The general syndication banks must get credit approval for a specific amount and submit formal commitment letters to
Chase requesting participation at a specific level.
• Total Commitment for all banks: Equals the number of banks times the Invitation Amount for general syndication banks; and the number of banks times
the sub-underwriting commitment for Chase and the other sub-underwriters (Lead Arrangers).
• Percent Scaled Back: In the event a deal is oversubscribed, the commitment submitted or offered by any bank may be reduced or “scaled back” to reach the
target loan amount. In this case, the HK $660 million sub-underwriter commitments are scaled back to HK $300 million final hold positions. Other banks get the
requested amounts with no scale-back.
• Final Tier Allocation: The per-bank commitment amount that has been accepted for each tier in the syndicate. This amount will be reflected in the final loan
documentation and is the amount on which closing fees are calculated.
• Total Allocation: This column shows the final allocations for each tier in the syndicate.
• Allocation per Bank: The final allocations expressed in $US.

as demand grew. In fact, Phase I included plans to
double capacity within the first ten years of opera-
tions. The real keys to success are having the land
available for growth and the ability to finance this
growth out of operating cash flow.
Because most of the construction site was
currently ocean, the sponsors had to reclaim land.
The Hong Kong Government agreed to pay for land
reclamation and infrastructure development at a cost
of HK $14 billion. According to the target dates, land
reclamation would begin at the end of 2000, resort
construction would begin in 2002, and the park
would open for business in 2005. The Government
supported the project because it expected the park
to generate sizable public benefits. One local econo-
mist estimated that land reclamation and construc-
tion would generate 16,000 new jobs, while the
resort would generate 18,000 jobs at opening and up
to 36,000 jobs within ten years.5
A new corporation, Hongkong International
Theme Parks Limited (HKTP), was created to construct,

5. Tracy Yu of Standard Chartered Group, reported by Knight Ridder Tribune

Bridge News, Sept. 11, 1999.

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At times, borrowers request that more than one bank share the lead mandate to
maximize the chance of a successful syndication or to reward several banks with
lead status and higher compensation.

TABLE 1 (CONTINUED)
Per Bank Income (HKK)
UW Closing UW Sub-UW Closing Pool Total Per Bank Total for All Banks
Fees Fees Spread Spread Fee Income Income (HKK) (USK) (HKK) (USK)

Chase 0.30% 0.70% $9,900 $1,650 $2,100 $200 $13,850 $1,776 $13,850 $1,776
No. Other Mandated Banks $0 $0 $0 $0 $0 $0 $0 $0
Lead Arrangers (Sub UW) 0.25% 0.70% $1,650 $2,100 $200 $3,950 $506 $15,800 $2,026
Arrangers 0.70% $1,750 $1,750 $224 $7,000 $897
Co-Arrangers 0.60% $900 $900 $115 $3,600 $462
Lead Managers 0.50% $500 $500 $64 $1,000 $128
TOTAL FEES $41,250 $5,288

CALCULATION OF FEE INCOME

HKK = Thousands of Hong Kong dollars; USK = Thousands of US dollars; UW = Underwriting.
• Fees: This example assumes that Chase charges the borrower an underwriting fee of 1.25% (total fees equal the product of the 125bp underwriting fee times
the HK $3.3 billion loan amount or HK $41.25 million) and allocates fees to syndicate members based on their commitment levels. As the underwriter, Chase keeps
30bp and gives 95bp to the sub-underwriters (including itself). The sub-underwriters keep 25bp on their sub-underwriting allocation and give 70bp for top-tier
(Arranger) commitments.
• Underwriter spread: This amount is Chase’s primary compensation for acting as the sole mandated bank and underwriter. The HK $9.9 million equals 30bp
times the total loan amount (HK $3.3 billion).
• Sub-underwriter spread: The five sub-underwriters (including Chase) each earn HK $1,650,000, or 25bp times the sub-underwriter allocation of HK $660 million.
• Closing Fee Income: Equals the amount received by each bank based on its final commitment amount. See below for further information.
• Pool Income: See below.

General Final Closing Fees Total Closing Fees

Syndication Allocation per Bank All Banks
Calculation of Pool Income Closing Fees (HKM) (HKK) (HKK)

TOTAL CLOSING FEE INCOME AVAILABLE 0.70% $3,300 $23,100

Chase 0.70% $300 $2,100 $2,100

Other Mandated Banks $0 $0
Lead Arrangers (Sub UW) 0.70% $300 $2,100 $8,400
Arrangers 0.70% $250 $1,750 $7,000
Co-Arrangers 0.60% $150 $900 $3,600
Lead Managers 0.50% $100 $500 $1,000
TOTAL CLOSING FEE INCOME PAYABLE $22,100

POOL INCOME (TOTAL AVAILABLE—TOTAL PAYABLE) $1,000

CALCULATION OF POOL INCOME

Chase agrees with the sub-underwriters to share equally in a pool consisting of any difference between the total closing fees available to be paid to member banks
and the actual amount of closing fees paid member banks.
HKM = Millions of Hong Kong dollars; HKK = Thousands of Hong Kong dollars.
• General Syndication Closing Fees: The fees offered to each syndicate tier.
• Total Closing Fee Income Available: Equals the closing fee of 70bp times the full loan amount of HK $3.3 billion.
• Total Payable Closing Fee Income: Equals the actual fees paid to each tier times the final allocation amounts for that tier. All banks earn the 70bp closing
fee or less in the general syndication.
• Pool Income: The difference between the Total Available Fee Income and the Total Payable Fee Income is split equally among the five sub-underwriters (HK
$1.0 million divided by five banks equals HK $200,000 per bank).

own, operate, and finance the project. It planned to
raise the HK $14 billion construction cost from four
sources (see Table 2)—this sum does not include an
additional $14 billion of land value and associated
infrastructure development contributed by the Hong
Kong Government. The Hong Kong Government
and Disney agreed to provide equity shares of HK
$3.25 billion (57% share) and HK $2.45 billion (43%
share), respectively. In addition, the Hong Kong
Government agreed to provide HK $6.1 billion of
subordinated debt with a 25-year maturity and
repayments starting 11 years after opening day. This

85
VOLUME 14 NUMBER 3 FALL 2001

TABLE 2
HKTP SOURCES OF CASH*
Debt Bank Term Loan
HK Government Loan
Subtotal
Equity HK Government
Walt Disney
Subtotal
TOTAL
Source: Chase et al., Hong Kong International Theme Parks Limited Offering Circular, September 2000.
*Excludes the estimated HK $14 billion cost of land reclamation and infrastructure development to be contributed to HKTP
by the Government in exchange for non-participating, convertible stock.
left a shortfall of HK $2.3 billion (16% of total capital),
which the Hong Kong Government hoped to fill with
some kind of external finance. Inclusion of private
sector financing would not only show that the
project was viable in the eyes of the international
banking community, but would also provide inde-
pendent oversight of construction as well as moni-
toring of ongoing operations. Eventually, HKTP
decided to raise HK $2.3 billion through a 15-year,
non-recourse term loan for construction and HK $1.0
billion in a 15-year, non-recourse revolving credit
facility for post-construction working capital needs.
Because HKTP did not need significant con-
struction funds until after the land reclamation was
complete, it had the option of waiting until 2002
before raising the bank debt. By waiting, it could
delay paying the commitment fees charged by the
banks. Jon Headley noted:
Although we had two years in which to place the
commercial loan, the Asian loan market was show-
ing signs of recovery by early 2000. Knowing the
structuring and syndication process could take six to
nine months, we decided to start the process sooner
rather than later. Our fear, given the recent volatility
in the Asian banking market, was that if we waited
until 2002, we might not be able to get a loan, never
mind a loan with attractive pricing.
Here Headley refers to the sharp economic
contraction and credit crunch experienced in South-
east Asia beginning in late 1997: Hong Kong’s GDP
fell 5.2% in 1998, its unemployment rate doubled
from 2.2% in 1997 to 4.7% in 1998, consumer prices
fell, and the outstanding balance of commercial bank
loans dropped by almost one-half. HIBOR, the Hong
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Amount (HK$ millions) Percent of Total
$2,275 16.2%
6,092 43.3
8,367 59.5
3,250 23.1
2,449 17.4
5,699 40.5
$14,066 100.0%
Kong inter-bank rate, spiked up from 6% in mid-1997
to 15% at year-end, and did not return to the 6% level
until the second half of 1998. It was against this
backdrop that HKTP, under Disney’s leadership, set
out to raise HK $3.3 billion of bank debt.
In April 2000, the Disney team developed a term
sheet for the bank financing and contacted the
company’s primary relationship banks as well as
other banks it viewed as having expertise in the HK
syndicated loan market. In these discussions, Disney
hoped to get a preliminary expression of interest and
an assessment of current conditions in the Hong
Kong bank market. Disney explained that they
wanted to raise HK $3.3 billion in a non-recourse
loan package on a fully underwritten basis, and
expected to select up to three lead arrangers for the
transaction. They wanted a 15-year term, which was
a potential stumbling block given that most banks
prefer maturities of less than five years on emerging
market loans. Finally, Disney wanted to use operat-
ing cash flow for expansion purposes and to pay its
management fees and royalties ahead of debt ser-
vice. Even though these two stipulations might pose
credit issues for certain lenders, Disney was adamant
that they be included in the term sheet.
It was highly predictable that Disney would
contact Chase Manhattan Bank. In addition to
being one of Disney’s top ten relationship banks,
Chase was the third largest bank in the U.S. and
a leader in the field of syndicated finance. The
financial press had recognized Chase’s leadership
with numerous awards: Best Loan House of the Last
25 Years 1974-1999 (International Finance Review),
Best at U.S. Syndicated Loans—1999 (Euromoney),
and Best Project Finance Arranger in the U.S.—1999
(Project Finance). Disney met with Chase and 16

In practice, approximately 70% of deals are done on an underwritten basis. For “new
money” deals—those that provide borrowers with new financing rather than
refinance an existing loan—the rate is closer to 90%.
other banks to discuss the proposed term sheet in
early May, and set May 16th as the deadline for first-
round proposals.
Following these meetings, the Chase team had
to decide how to bid on this mandate. Managing
Director Matt Harris described their logic:
There are three ways to approach a deal: bid
aggressively to win, bid less aggressively without fear
of losing, and no bid. Although Disney is an impor-
tant global client, the deal did not seem that attrac-
tive to us initially. It had a long tenor (15 years)
which banks don’t like, we had to contend with the
problems at Disneyland Paris, the sponsors wanted to
mandate as many as three lead arrangers which
hurts our economics, and our competitors, especially
the local banks like Bank of China and Hong Kong
Shanghai Banking Corporation (HSBC), were likely
to bid aggressively. And so, we decided to bid less
aggressively without fear of losing. Yet to protect our
reputation, we wanted to bid aggressively enough to
make the short list for this high-profile deal. If we
happened to win the mandate, it would have to be on
terms that met our earnings thresholds
Chase submitted its package on schedule and
learned on May 25th that it, along with five other
banks (HSBC, Bank of China, ABN-Amro, Citibank,
and Fuji Bank), had been short-listed for the man-
date. Disney instructed each bank to submit final
proposals by July 19th.
As economic conditions in Hong Kong im-
proved, with liquidity returning to the bank market,
and as Government commitment to the project
became clearer—the loan appeared more like “quasi-
sovereign” credit rather than a pure corporate expo-
sure—Chase became more interested in winning the
mandate. The deal team knew, however, that they
had to address several key credit and syndication
issues before they could feel comfortable leading a
fully underwritten transaction. With regard to the
credit issues—long tenor, lack of collateral, no
subordination of management fees, and an ability to
use cash flows for project expansion rather than debt
repayment—the team became comfortable with the
credit risk after running various financial models. A
key factor in their willingness to accommodate some
6. The benchmark transactions were two quasi-sovereign deals (Airport
Authority of Hong Kong, 7/99; Mass Transit Railway Corp., 9/99), two project
finance deals (Hutchinson Telephone Corp., 3/00; Asia Container Terminals, 1/00),
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of the unusual terms was the loan’s seniority relative
to other claimants and the fact that it represented
only 16% of total capital. Based on an analysis of
comparable transactions,6 much the same way in-
vestment bankers price acquisitions, the team de-
cided on a loan spread for the deal. Initially, the
spread would be 100 basis points over HIBOR,
stepping up to 125 basis points in year six, and to
137.5 basis points in year 11. Step-up pricing, a
common feature on project loans, appeals to bor-
rowers who want lower expenses in the early years
and who plan to refinance before the step-ups take
effect. It also appeals to lenders, who view the
increases as compensation for longer maturities and
greater future uncertainty.
The team also reviewed the syndication risks.
The most critical decisions were whether to agree to
fully underwrite the deal and how much to charge.
Although a fully underwritten deal exposed the bank
to greater risk, the team decided to seek senior
management approval for a full underwriting as
requested by Disney. Such a proposal would show
Chase’s support for the client, signal its confidence
in the deal, and provide greater profit for the bank.
It might also set Chase apart from other banks that
were unable to commit to underwrite the full amount.
As for the fee, they thought something in the range
of 100 basis points to 150 basis points would be
appropriate—for simplicity and confidentiality rea-
sons, I assume the fee was 125 basis points. Harris
commented:
If anything, we thought our fee might be on
the high end, but we didn’t feel bad about this for
two reasons. First, we were not afraid to lose this
deal on up-front pricing—we care about deal
quality and profitability, not deal volume. Sec-
ond, if properly marketed, borrowers viewed the
up-front fees in terms of their annual cost, not the
nominal first-year cost.
As part of their final proposal, Chase did three
things to improve the chances of winning. First, they
added several creative elements to the deal. For
example, they suggested splitting the revolving
credit facility into two parts, a HK $250 million
portion that would be available for construction cost
and a corporate finance deal (Cheung Kong Finance Co., 12/99). In addition, they
studied a number of regional deals that had closed before the Asian crisis.
FALL 2001

overruns and a HK $750 million portion that would
not be available until construction was completed.
While the “available” portion would carry a market-
based commitment fee of 37.5 basis points per
annum, the unavailable portion would carry a dis-
counted fee of 15 basis points per annum. Second,
Chase provided regular market updates to Disney.
And third, they presented two possible syndication
strategies, one with and one without sub-underwrit-
ing. In addition, they presented a list of target banks
to show how the syndication was likely to play out
and to illustrate their knowledge of the local banking
market. Vivek Chandiramani, a member of the Chase
deal team, described this process:
The key to success in this business is being
close to the market. This means being in touch with
banks on a weekly, if not daily, basis. We started
with a universe of approximately 90 banks and
created a target lender list that might be interested
in this deal. We then partitioned the target list into
commitment size categories and assigned partici-
pation probabilities for each category. This process
gives us a sense of liquidity and an indication of
whether the deal will clear the market. Based on
our analysis for the Disney deal, we expected it
would be oversubscribed by 57%. This kind of
analysis illustrates our closeness to the market and
our confidence in the deal.
As instructed, Chase submitted its final proposal
on July 19th, and was notified by Disney that it had
won the lead mandate on August 10th. Jeff Speed,
Disney’s Vice President of Corporate Finance and
Assistant Treasurer, said:
We chose Chase because its pricing was competi-
tive, it agreed to underwrite the full amount, and they
showed a high degree of flexibility on structuring,
particularly their willingness to permit ongoing capi-
tal expenditures without burdensome covenants.
Having won the sole mandate, Chase met with
Disney to negotiate a commitment letter with final
terms, discuss the syndication strategy, and map out
a syndication timetable. As with any legal document,
the content of a formal commitment letter invariably
requires negotiation. From experience, Chase knew
its standard “market flex” provision was likely to be
one source of contention. The market flex clause that
was presented to Disney read:
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Chase shall be entitled, after consultation with
Disney and the Borrower, to change the structure,
terms, amount, or pricing of the Facility if the syndi-
cation has not been completed due to a change in the
Hong Kong Dollar market and if Chase determines,
after consultation with Disney and the Borrower,
that such changes are advisable to ensure a success-
ful syndication of the Facility.
Although borrowers dislike the provision,
Chandiramani argued for its inclusion, 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 competitors sometimes use it
against us in competitive mandates, because things
can change between the time you sign a deal and the
time you try to close it. Unlike the “material adverse
effect” (MAE) or “material adverse change” (MAC)
clauses, which allow us to pull a commitment, the
market flex provision is not an out. Instead, it pro-
vides room to maneuver, to adjust key terms as with
a bond issue. But to date, we have never invoked the
market flex clause in Asia. Nor did we invoke the MAC
clause, even during the Asian financial crisis of
1997-1999, and we tell this to clients.
Disney, like many borrowers, countered with
the argument that they were paying for a fully
underwritten deal expressly to avoid syndication
risk. After several weeks of negotiations over this one
clause, they reached an agreement limiting the
extent of the flex. Typically, borrowers permit some
flex in pricing, say 25 basis points, as well as in
certain covenants, but are less willing to permit flex
in amount. With this issue resolved, Chase turned its
attention to the syndication strategy.
DESIGNING A SYNDICATION STRATEGY
The determinants of syndicate structure are
many and varied, ranging from project type and
sponsor to project location and loan size. Any
attempt to draw lessons from this case study must
confront two problems. First, observed structures do
not always reflect intended structures, due to uncer-
tainty in the bank market. To deal with this problem,
I have relied on personal interviews with the partici-
pants. Second, the Hong Kong Disneyland project,
like all projects, had idiosyncratic features that
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Project finance deals have higher closing fees than other loan types because they
require more credit analysis and involve riskier positions given the non-recourse
nature of the loans.

TABLE 3 COMPARISON OF POSSIBLE SYNDICATION STRATEGIES

Hold
Amounts Syndication Strategy
(HK$mn) #1 #2 #3 #4 #5 #6

Type of Mandate for Chase (Sole vs. Joint) Sole Joint Sole Sole Sole Joint
Type of Underwriting (Sub vs. General) Sub General General General General Sub

No. of Banks by Syndicate Tier

Chase (Mandated Arranger) $300 1 1 1 1 1 1
Coordinating Arrangers $300 0 2 0 0 0 2
(other Mandated Banks)
Lead Arrangers $300 4 0 0 0 0 3
(Sub-Underwriters)
Arrangers $250 4 4 4 12 0 4
Co-Arrangers $150 4 6 8 0 0 2
Lead Manager $100 2 5 8 0 30 2
Total No. of banks 15 18 21 13 31 14

Chase Maximum Exposure (HK$ millions) $3,300 $1,100 $3,300 $3,300 $3,300 $1,100
Chase Feesa
HK$ in millions $13.85 $8.78 $23.36 $20.25 $26.25 $6.90
US$ in millions $1.78 $1.13 $3.00 $2.60 $3.37 $0.88
Chase Exposure in the General Syndication
HK$ in millions $660 $1,100 $3,300 $3,300 $3,300 $550
US$ in millions $85 $141 $423 $423 $423 $71
Chase Fees/Chase Gen. Syndication Exposure 0.021 0.008 0.007 0.006 0.008 0.013
No. Banks Needed to Control 60% of the Loan 7 8 10 8 18 7

Source: Based on author’s estimates

a. Assuming an underwriting fee of 1.25%, sub-underwriting fee of 25 bp (where applicable), top-tier closing fees of 70 bp, and a final hold position for Chase of HK
$300 million.

influenced the loan structure. What is representative,
however, is the process Chase went through and the
issues it confronted during the syndication. This
section describes several of these key issues and the
trade-offs Chase faced in designing a syndication
strategy for the loan.
The first issue Chase had to address was whether
to proceed with a one-stage, general syndication or a
two-stage syndication with sub-underwriting. From
Chase’s perspective as the underwriter, there was a
risk/return trade-off. Proceeding directly into general
syndication involves greater syndication risk and greater
credit risk if the deal is undersubscribed, but entails
greater returns. With the sub-underwriting approach,
in contrast, the underwriter shares the risk but also the
fees with other banks. Of course, involving more banks
and especially prominent banks as lead arrangers or
underwriters can facilitate the syndication. Here, I
simply intend to illustrate how syndicate structure
affects compensation and exposure.
Table 3 presents the economics for six possible
syndication strategies assuming a HK $3.3 billion
loan and a 125 basis point underwriting fee. The
strategies differ by whether they have a sole or joint
mandate, a sub-underwriting or not, and a large or
small number of banks. Comparing Strategy #1 (a
sole-mandated deal with sub-underwriting—the
economics correspond to the example shown in
Table 1) against Strategy #3 (a sole-mandated deal
with general syndication), we see that the general
syndication does, indeed, have higher risk and
higher returns. The risk, defined here as the maxi-
mum exposure in the general syndication, is HK $3.3
billion compared to only HK $660 million when the

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TABLE 4 All Syndicated Loans
COMPARISON OF Syndicated Syndicated Project Finance Loans for General
SYNDICATED LOAN Loans Loans >$75m Loans >$500m Corp. Purposes
STRUCTURES
Average Size (US$ millions) $146 $304 $948 $108
Average Maturity (years) 4.8 9.4 10.2 4.5
COMPENSATION (bp)
Spread over LIBOR 134 131 108 113
Commitment Fee 31 32 29 28
Up-front Fee 37 53 48 31
DEBT OWNERSHIP CONCENTRATION (%)
Largest Single Share 19% 20% 10% 19%
Share of Top 5 Banks 59% 61% 37% 62%
Number of Banks 16 14 28 13

Source: S. Kleimeier and W. Megginson, “Are Project Finance Loans Different from Other Syndicated Credits?,” Journal of
Applied Corporate Finance, Vol. 12, No. 1 (Spring 2000); B. Esty and W. Megginson, “Legal Risk as a Determinant of Syndicate
Structure in the Project Finance Loan Market,” Harvard Business School mimeo (2001); B. Esty and W. Megginson, “Credit
Risk as a Determinant of Syndicate Structure,” Harvard Business School mimeo (2001).

HK $3.3 billion is divided evenly among five sub-
underwriters, while the return, Chase’s total fee
income, is HK $23.26 million compared to HK $13.85
million. Note that a jointly mandated deal with sub-
underwriting (Strategy #6) has even less risk but an
even lower return. The only dominated strategy is
Strategy #2, which involves a joint mandate with
general syndication: Strategy #1 offers higher fees
and lower risk in terms of exposure.
An underwriter’s desire to sub-underwrite a
deal is directly proportional to the expected difficulty
of syndication, which is higher with either an
especially aggressive deal or a tight credit market.
Because sub-underwriting can expedite the process
but does not cost the borrower anything extra, most
borrowers are amenable to it. Even when the
underwriter expects a successful general syndication
and, therefore, sees little need for a sub-underwrit-
ing, the borrower may still request a sub-underwrit-
ing so that its relationship banks will have the benefit
of senior status and increased compensation. In this
case, Chase knew it was important to accommodate
Disney’s preferences for a sub-underwriting group
that included several short-listed banks as well as
other qualified banks with expertise in syndicated
lending and project finance, particularly in Asia. In
commenting on this decision to use a sub-underwrit-
ing, Chase’s Matt Harris said:
Relationship considerations, while not the only
consideration, are the most important considerations
in deciding on a syndication strategy. Accordingly,
we decided not to oppose Disney’s preference for a
sub-underwriting with specific banks. As the sole
mandated bank, we knew we were going to make
more than we had initially expected. We just had to
resist the temptation to be too greedy.
Next, Chase had to select a target lender group,
a decision that depended on the characteristics of the
local market and three interrelated issues: how big
a final hold position Chase ultimately wanted to take,
how many banks to include in the syndicate, and
which banks to invite. Chase’s standard practice is to
hold 10% of loans it arranges, a target equal to HK
$330 million in this case. With larger or riskier loans,
its preference is to hold smaller shares, although
bankers readily admit that they often have to hold
larger shares of riskier loans. Because of the higher-
than-average credit risk (mainly due to the 15-year
final maturity), Chase set a target final hold position
of HK $300 million (9.1% of the total loan). Consis-
tent with this target final hold position, Table 4 shows
that the largest bank lender typically holds 20% of the
average syndicated loan but only 10% of the largest
project finance loans. Whereas these figures repre-
sent shares at closing, it is important to remember
that after closing, banks can and sometimes do sell
down their positions in the large secondary market
for bank loans. Increasingly, banks are bundling
their project finance loans into portfolios and selling
them through collateralized bond obligations (CBOs).
As a practical matter, however, Chase sells its
position down to zero in only very rare instances.

90
JOURNAL OF APPLIED CORPORATE FINANCE

Inclusion of private sector financing would not only show that the project was viable
in the eyes of the international banking community, but would also provide
independent oversight of construction as well as monitoring of ongoing operations.
In selecting a final hold position for risky loans,
a bank must evaluate two sets of conflicting objec-
tives. On the one hand, diversification motives argue
for holding smaller positions. On the other hand,
agency or incentive conflicts can force the bank to
retain larger positions. For example, a bank might
have to retain a larger share of a riskier loan to
assuage concerns about the credit, and thereby
induce other banks to participate. Similarly, as the
chief monitor of borrower repayment, the lead
arranger should hold a larger position than other
banks to demonstrate a clear incentive to monitor the
loan. Evidence shows that lead banks hold larger
shares of riskier loans both in the project finance
market and in other syndication markets.7
With a 9% final hold position, Chase then had
to decide how to syndicate the other 91% of the loan,
which leads to the question of syndicate size.
Ignoring for the moment the difference between
invitations and acceptances—the underwriter might
want 20 banks but get only ten acceptances in the
general syndication—the question is really about the
advantages and disadvantages of smaller syndicates.
From the borrower’s perspective, smaller syndicates
ensure greater confidentiality, concentrated voting
control, and administrative convenience. Confiden-
tiality can be important because sponsors do not
want key information such as their project’s cost
structure widely known. Similarly, host governments
are reluctant to share information on the extent of
public assistance (as in the discussions surrounding
government support in the form of “launch aid” for
Airbus’ new A380 jet). With regard to voting control,
loan documents usually specify that waivers and
amendments, which invariably occur in project
loans, require approval from banks holding a de-
fined majority of the total commitment. In this case,
a group of banks known as the “instructing banks”
holding at least 60% of the loan had to approve such
changes. Table 4 shows that the five largest banks
often control 60% of the total loan, except for the
7. Project finance loans are studied by B. Esty and W. Megginson in “Legal Risk
as a Determinant of Syndicate Structure in the Project Finance Loan Market,”
Harvard Business School mimeo (2001); syndicated loans are studied by K. Simons
in “Why Do Banks Syndicate Loans?,” New England Economic Review (January/
February 1993) and S. Dennis and D. Mullineaux, “Syndicated Loans,” Journal of
Financial Intermediation, Vol. 9 (2000); loan sales are studied by G. Gorton and
G. Pennachi, “Banks and Loan Sales: Marketing Non-Marketable Assets,” Journal
of Monetary Economics, Vol. 35 (1995); and venture capital syndications are studied
by J. Lerner, “The Syndication of Venture Capital Investments,” Financial
Management, Vol. 23 (1994).
8. Models of costly default are presented in P. Bolton and D. Scharfstein,
“Optimal Debt Contracts and the Number of Creditors,” Journal of Political
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largest loans. In default situations, it is easier to
restructure with a smaller syndicate and pari passu
treatment across banks.
Whereas most of the benefits of small syndicates
accrue to the borrower, most of the benefits of large
syndicates accrue to the underwriters. For example,
underwriter compensation generally increases as
syndicate size increases. Comparing Strategies #4
and #5 in Table 3 (both are sole-mandated deals with
general syndication), we see that the larger syndicate
structure (31 banks vs. 13 banks) results in more fee
income to the underwriter (HK $26.25 million vs. HK
$20.25 million) for the same level of risk. Another
benefit of larger syndicates is that they more effec-
tively deter strategic default because the group can
credibly threaten to withhold all future lending.8 A
third reason that underwriters may prefer larger
syndicates is that they lead to greater competition
among investor banks and, therefore, better execu-
tion and pricing. Finally, by including more banks,
underwriters can avoid disappointing banks that
might otherwise be excluded from the deal. Of
course, a syndicate of 31 banks instead of 13 banks
involves higher administrative costs and additional
coordination problems; with more banks in the
syndicate, restructuring becomes more difficult and
more costly. And participating banks prefer smaller
syndicates because they involve greater revenue
and allow them to have more voice in amend-
ments and waivers.
Academic research shows that both monitoring
and renegotiation incentives are important determi-
nants of syndicate size. Smaller syndicates compris-
ing banks with larger loan shares are more effective
monitors of borrower performance.9 Firms that bor-
row from smaller syndicates experience larger ab-
normal stock returns upon the announcement of a
new bank loan.10 And in situations with extensive
credit or sovereign risk, underwriters prefer smaller
syndicates, apparently to ensure low-cost renegotia-
tion in settings where default is more likely.11
Economy, Vol. 104 (1996); D. Diamond, “Monitoring and Reputation: The Choice
Between Bank Loans and Directly Placed Debt,” Journal of Political Economy, Vol.
99 (1991); and B. Chowdry, “What Is Different About International Lending,”
Review of Financial Studies, Vol. 4 (1991).
9. Evidence on the disadvantage of larger syndicates is presented in D. Preece
and D. Mullineaux, “Monitoring, Loan Renegotiability, and Firm Value,” Journal
of Banking and Finance, Vol. 20 (1994).
10. See C. James, “Some Evidence on the Uniqueness of Bank Loans,” Journal
of Financial Economics, Vol. 19 (1987).
11. Syndicate size declines in moderate and high-risk countries; see B. Esty
and W. Megginson, “Legal Risk as a Determinant of Syndicate Structure in the
Project Finance Loan Market,” Harvard Business School mimeo (2001).
FALL 2001

Besides selecting a desired final hold position
and a target syndicate size, Chase had to create a
target invitation list. Again, this decision is based in
part on the specific bank market where the project
is located—some emerging markets have few banks.
More generally, however, this decision focuses on
the inclusion of relationship banks and the choice
between domestic and foreign banks.
Disney had its own preferences on which banks
to include, but Chase augmented these with banks
that would increase the likelihood of a successful
syndication. Because the project was located in
Hong Kong and the loan was denominated in Hong
Kong dollars, local banks were the natural choice.
They had better information about the project and
the country, would not be exposed to currency risk,
and could add a level of political protection.12 Chase
was particularly attuned to the importance of getting
local support for the deal and wanted local banks
such as HSBC, Bank of China, and Standard Char-
tered, each of which has an important regional
presence, involved in senior roles. Their participa-
tion and endorsement would send a strong signal to
the credit committees of both the smaller Hong Kong
banks as well as the larger European and American
banks. For these reasons, Chase decided to invite the
major banks in the region to be sub-underwriters and
to target the smaller local banks for participation in
the lower tiers.
In deciding how to structure the tiers, Chase
followed a fairly standard procedure. The selec-
tion of invitation amounts, titles, and fees depends
in part on the universe of available banks and in
part on minimum compensation levels. Chase
knew that there was a large group of local banks
that could hold positions ranging from HK $100
million to HK $250 million (US $12.8 to US $32.1
million) and that each bank would need a closing
fee of at least US $50,000, if not US $75,000, to
cover the internal costs of reviewing the loan. The
bankers then worked backwards to calculate a
minimum closing fee. With a target hold position
of HK $100 million, a 50 basis point closing fee
would generate HK $500,000 or US $64,103 in fee
income, which was in the desired range. To
induce banks to take larger positions, Chase
would have to offer more in fees. In the end, they
decided on three participation levels: an Arranger
12. Some argue that governments are less likely to expropriate from domestic
lenders while others argue that governments are less likely to expropriate from
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tier for commitments of HK $250 million with a
closing fee of 70 basis points, a Co-Arranger tier
for commitments of HK $150 million with a fee of
60 basis points, and a Lead Manager tier for
commitments between HK $75 million and HK
$100 million with a 50 basis point fee. While it
might have been possible to squeeze the fees and
pay 40 basis points for Lead Manager commit-
ments and 60 basis points for Arranger commit-
ments, Chase decided to go with higher compen-
sation to guarantee a successful syndication.
EXECUTING THE SYNDICATION STRATEGY
Chase launched the sub-underwriting in mid-
September by sending invitations to seven banks:
HSBC, Bank of China, Fuji Bank, Bank of America,
BNP Paribas, Credit Agricole, and Standard Char-
tered. HSBC, Bank of China, and Fuji Bank had
originally been short-listed for the arranger man-
date; Bank of America and Standard Chartered
had expertise in the Hong Kong syndicated lend-
ing market and had lending relationships with
Disney in the U.S.; and BNP Paribas and Credit
Agricole had senior roles in the Disneyland Paris
financing. Chase asked the banks to make under-
writing commitments of HK $600 million in return
for Lead Arranger titles and sub-underwriting fees
of 25 basis points. When all of the banks except
one agreed to participate, Chase scaled back their
exposures to HK $471 million each (HK $471
million × 7 sub-underwriters = HK $3.3 billion).
Chase hoped to reduce these commitments to
final hold positions of HK $300 million or less in
the general syndication.
Chase launched the general syndication in
early October with invitations to 67 banks requir-
ing pro rata commitments for the HK $2.3 billion
construction term loan and the HK $1 billion
revolving credit facility. With high confidence due
to the successful sub-underwriting, Chase set a
very strict deadline for commitments of October
25th, reserving the right to close the syndication
early and reiterating its right to make final alloca-
tions at its discretion. The general syndication
generated commitments totaling HK $5.3 billion
from 25 banks. Counting the original HK $4.2
billion in commitments from the seven sub-under-
foreign lenders, especially lenders from countries that conduct trade with or give
aid to the host country.
 17456622, 2001, 3, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1745-6622.2001.tb00440.x by Universidad Publica De Navarra, Wiley Online Library on [16/11/2022]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
In selecting a final hold position for risky loans, a bank must evaluate two sets of
conflicting objectives. On the one hand, diversification motives argue for holding
smaller positions. On the other hand, agency or incentive conflicts can force the
bank to retain larger positions.

TABLE 5 FINAL ALLOCATIONS FOR THE HONG KONG DISNEYLAND LOAN

Number Original Final Hold Total Amount Total Fees

of Commitments Scale-back Per Bank All Banks Per Bank
Syndicate Tier Banks (HK$ Millions) (Percent) (HK$ Millions) (HK$ Millions) (US$ 000)

Mandated Arranger (Chase) 1 $471 72.4% $130.0 $130 $1,551

Lead Arranger (Sub-Underwriters) 6 471 72.4 130.0 780 281
Arranger 18 250 58.0 105.0 1,890 94
Co-Arranger 3 150 43.3 85.0 255 65
Lead Manager 2 100 30.0 70.0 140 45
Lead Manager 2 75 30.0 52.5 105 34
Total 32 $3,300

Source: Company documents, author’s estimates; assumes an underwriting fee of 125bp.

writers, Chase had received credit commitments
totaling HK $9.5 billion, an oversubscription of
close to three times. Of the 42 banks that declined
to participate, 25 cited concerns about the tenor
(final maturity), eight cited concerns over pricing,
three cited concerns about funding a Hong Kong
dollar loan, three cited concerns over Hong Kong
exposure or credit, and three could not get
internal credit approval for the deal.
With an oversubscribed deal, Chase had to scale
back each bank’s commitment based on five criteria.
First, the total amount had to equal HK $3.3 billion.
Second, the minimum closing fee had to be at least
US $50,000. Chase’s Matt Harris described the other
three criteria:
We determine the final takes based on three
criteria: fairness—giving the banks as close to what
they committed as possible; consistency—making
sure the scale-back is consistent for all banks within
a given tier; and client considerations—giving ap-
propriate weight to the client’s preferences on such
things as final allocations for specific banks or voting
rights within the bank group.
In this case, client considerations regarding
composition of the sub-underwriting group and
voting control were the most important.
Table 5 shows the final allocations for the Hong
Kong Disneyland loan. The scale-back percentages
ranged from a low of 30% for the Lead Managers to
a high of 72% for the sub-underwriters. In terms of
the five criteria for determining success, Chase
appears to have met two or three of them depending
on one’s assessment of the criteria:
1) total amount raised = HK $3.3 billion: met
2) minimum closing fee = US $50,000: not met
(banks in the Lead Manager tier earned less)
3) fairness: not met (most banks received substan-
tially less than their original commitments)
4) consistency: met (scale-back percentages are
constant within tiers)
5) client considerations: met/unmet (while Chase
invited the banks Disney requested in the sub-
underwriting, the lending group was larger than
Disney originally wanted; it contained 32 banks, of
which 17 were needed to reach the 60% threshold for
approving waivers).
In judging this performance, one can argue that
this deal, like most deals, had elements of both
success and failure. There are several reasons to
argue that it was a success. From the project’s
perspective, the heavy oversubscription was a show
of confidence in the project and in Hong Kong.
Second, the deal closed in a timely fashion, with the
terms and pricing desired by Disney. From the
banks’ perspective, all banks that wanted to partici-
pate received shares of the loan. Especially pleased
were the three sub-underwriters (Credit Agricole,
BNP Paribas, and Standard Chartered Bank) that
were not on the short list yet received sub-under-
writer compensation. And finally, it was a success
from the perspective of Chase, who won the sole
mandate on a marquee deal, one of the most
important financings since the start of the Asian crisis
in 1997. In addition, Chase earned substantial fees as
well as Lead Arranger status—Table 5 shows it earned
an estimated $1.55 million in fees from the transaction.
(Again, this is based on my hypothetical fees, which
may or may not reflect actual compensation.)

93
VOLUME 14 NUMBER 3 FALL 2001

Nevertheless, there are aspects of the deal
that appear less favorable. For example, one can
interpret the heavy oversubscription as an indica-
tion that either Disney overpaid Chase for the
underwriting risk or that Chase overpaid the
market. (Alternatively, Disney could have re-
quested more favorable loan terms.) The magni-
tude of the oversubscription also indicates that a
sub-underwriting was probably not necessary,
and that Chase could have retained a larger
fraction of the fees by proceeding directly to a
general syndication. Nevertheless, Chase led a
very successful deal. It was able to mobilize the
Asian bank market when it had to, which should
bode well for future business. Viewed from this
perspective, Chase erred on the side of conserva-
tism. Rather than risking its reputation by leading
an undersubscribed or failed syndication, Chase
chose to pay larger fees to a larger investor bank
group to ensure the success of the syndication.
The general syndication closed on October
25, 2000, and Chase made the scale-backs de-
scribed in Table 5. Some conclusions can be
drawn by comparing the actual syndication results
with Chase’s projections in its final proposal to
Disney in mid-summer. The general syndication
produced commitments of HK $5.3 billion, 16%
more than what Chase predicted it could raise.
Chase’s projected bank response rate in its final
presentation to Disney was 34%; the actual re-
sponse rate was 37%. In terms of bank identities
and nationalities, only four of the 32 banks were
not on the target list in Chase’s final presentation.
Taken as a whole, the outcome shows that Chase’s
confidence in its ability to distribute the loan was
well founded. It knew its investor base well and
had the ability to mobilize the Hong Kong market
for its clients. Of course, Chase benefited from the
fact that the Hong Kong bank market continued to
improve during the period—perhaps more than
expected.
The parties signed the loan agreement, and up-
front (underwriting and closing) fees were paid, on
November 15, 2000. Financial closing (the date when
all conditions precedent to borrowing have been
met and the loan can be drawn) occurred in March
2001. Disney does not expect to borrow much under
the construction facility until the reclamation work is
finished sometime in the next two years. Neverthe-
less, it has a committed loan with favorable terms and
attractive pricing in its possession.
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CONCLUSION
Besides illustrating the process, terminology,
and economics of loan syndication, this case study
reveals several important features of syndicated
lending. First, it shows the importance of two kinds
of banking relationships. There are borrower/credi-
tor relationships such as those between Disney and
its relationship banks. Disney made sure to invite
them to bid for the lead mandate and pushed hard
to make sure that qualified banks were invited to
participate in the sub-underwriting. There are also
arranger/investor relationships such as those be-
tween Chase and its universe of investor banks.
Harris described these relationships as follows:
Chase takes its relationships with investor banks
very seriously. We don’t simply view them as “stuffee”
banks, but rather partner investors with whom a
close relationship built on trust is critical. While we
could often keep a larger slice of the pie, we don’t
want to expend any goodwill with our investors by
leaving them with the impression that we had gouged
them on fees or denied them an opportunity to
acquire a meaningful earning asset. We view having
paid more in fees than we really needed to as an
investment in our relationships with other banks that
are active in the market.
Even though Chase had an opportunity to earn
more than twice as much as it did on this transac-
tion—up to US $3.4 million under certain syndica-
tion strategies compared to an estimated US $1.55
million on this deal—it chose to satisfy client prefer-
ences for a sub-underwriting with specific banks.
This article also illustrates the different forms of
debt ownership. At one extreme, small syndicates of
two or three banks resemble the standard academic
models of single-bank, private debt lending. At the
other extreme, large syndicates of 100 to 200 banks
begin to resemble the models of numerous indepen-
dent public bondholders. The majority of bank
lending, however, falls somewhere in the middle,
with syndicates of ten to 30 banks as typical. For this
reason, syndicated lending can be viewed as an
intermediate form of financing, replete with interest-
ing governance and structuring issues. Selecting an
optimal capital structure involves not only how
much and what type of debt but also the nature of
debt ownership. Issues like how many banks, which
banks, and ownership concentration can all affect
 17456622, 2001, 3, Downloaded from https://onlinelibrary.wiley.com/doi/10.1111/j.1745-6622.2001.tb00440.x by Universidad Publica De Navarra, Wiley Online Library on [16/11/2022]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Smaller syndicates comprising banks with larger loan shares are more effective
monitors of borrower performance. And in situations with extensive credit or
sovereign risk, underwriters prefer smaller syndicates, apparently to ensure low-cost
renegotiation in settings where default is more likely.

the value of a banking relationship and, therefore,
the value of the issuing firm. As academics, we need
to recognize this continuum and the consequences
of various ownership structures, as we have done
with equity ownership, and begin to develop the
next generation of theoretical models. Because these
models will more closely reflect actual lending
practice, they should have greater predictive power
and provide more useful guidance on capital struc-
ture and corporate governance decisions.

BENJAMIN ESTY

is Associate Professor of Business Administration at the Harvard

Business School.

95
VOLUME 14 NUMBER 3 FALL 2001

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