Chase’s Strategy for Syndicating the Hong Kong Disneyland Loan
1. Chase should have bid for the loan mandate in such a way to maximize the investment fee income after controlling for risks involved, and the client’s preferences for syndicated loan. Thus. Chase faced a trade off between Risks and rewards. We have to weigh out the risks with rewards as below
Risks Involved
• Credit and Downgrade risk – This arises from the level of exposure that Chase would take in the HK$3.3 billion loan. Usually they put a limit of 10%. Thus Chase had to bid in such a way to have greater co-operation from syndicating partners so as to reduce the resulting loan exposure by way of spreading the risk with other players
• Underwriting risk – The risk that the issue may be undersubscribed leading to Chase taking up the balance loan amount. Thus Chase had to set proper price for the loan (spread) and to include more sub underwriters to share the burden in the event of under subscription
• Political Risks – The risk that the Hong Kong government may back track on their promises and that they may pressure them to include local banks in the syndication
• Reputational risk – In the event that they put a bid that is not fair to other participants, this would taint their standing in the project finance industry.
• Liquidity risk – the higher the exposure to the loan, the higher their liquidity risk because the loan had a very loan tenure of 25 Years and that the project is being done in an emerging market where the level of players is not sufficient to match liquidity levels of developed markets
Rewards
• A successful bid would put Chase firmly on top of the League on Project and Syndicate finance. It would also give them a first mover advantage into the growing emerging market
• The bid should maximize their underwriting fees and also add a quality loan asset in the portfolio of Chase. Thus they had to bid in such a way to maximize both underwriting fees (by optimizing number os partners) and interest income (by choosing the optimum spread
Risks Involved
• Credit and Downgrade risk – This arises from the level of exposure that Chase would take in the HK$3.3 billion loan. Usually they put a limit of 10%. Thus Chase had to bid in such a way to have greater co-operation from syndicating partners so as to reduce the resulting loan exposure by way of spreading the risk with other players
• Underwriting risk – The risk that the issue may be undersubscribed leading to Chase taking up the balance loan amount. Thus Chase had to set proper price for the loan (spread) and to include more sub underwriters to share the burden in the event of under subscription
• Political Risks – The risk that the Hong Kong government may back track on their promises and that they may pressure them to include local banks in the syndication
• Reputational risk – In the event that they put a bid that is not fair to other participants, this would taint their standing in the project finance industry.
• Liquidity risk – the higher the exposure to the loan, the higher their liquidity risk because the loan had a very loan tenure of 25 Years and that the project is being done in an emerging market where the level of players is not sufficient to match liquidity levels of developed markets
Rewards
• A successful bid would put Chase firmly on top of the League on Project and Syndicate finance. It would also give them a first mover advantage into the growing emerging market
• The bid should maximize their underwriting fees and also add a quality loan asset in the portfolio of Chase. Thus they had to bid in such a way to maximize both underwriting fees (by optimizing number os partners) and interest income (by choosing the optimum spread