Professional Documents
Culture Documents
HKDL Group 4
HKDL Group 4
HKDL Group 4
Kong
Disneyland Loan
PROJECT FINANCE RISK MANAGEMENT
TERM 4
Group 4
BHASKARAM GANGOPADHYAY IPMX15014
MANDAVI SINHA IPMX15028
MD MUZAFFAR HAMID IPMX15029
RISHI BARDHAN IPMX15037
SOURAV KAR IPMX15051
SRIKANTH KATTULA IPMX15052
TEJO BHARADWAJ SUSARLA IPMX15055
SHANMUKH SAI V IPMX15100
Hongkong Disneyland Theme Park
HKTP presents the following case to the list of lenders for its upcoming
Hongkong Disneyland project. It is important for HKTP to showcase the
potential of its project as well as the various dimensions of the project that
mitigates the project risks to a bare minimum.
It consists of a list of identified sources of risks and mitigation measures,
and also the answers to the following questions.
HKTP, a jointly owned venture between the Walt Disney Company and the
Hongkong Government, wants to build the theme park in phases to cater to a
huge demand for theme park entertainment among the growing young Asian
population.
Hongkong Disneyland Theme Park
Most of the project costs including land reclamation and infrastructure development are solely
committed by the HK Govt. It sponsors the project expecting lots of new job creation, increase
in domestic production, and public wealth creation, especially at the end of the recent recession
when the market is showing some early signs of recovery.
HK Govt and Disney company are jointly infusing about HK$ 11.8 billion (84%) of the total
project cost of about HK$ 14 billion (excluding HK$ 14 billion of land reclamation and
infrastructure development cost fully borne by the HK Govt) at a D/E ratio of 60:40. To make
the project viable in the eyes of the international banking community in terms of risk
identifications and risk mitigation, and establishing debt covenants in terms of controlling and
monitoring of the project activities, HKTP wants to borrow a loan of HK$ 2.275 billion only
from loan syndication.
Learning from its experience in Paris Disneyland, HKTP wants to develop the park in phases
starting small initially and then adding capacity over time as demand increases. It also believes
that the project’s success lies in the availability of the land and the ability to finance the future
growth out of its own operating cash flows.
Why is full underwritten required?
a) Single point of responsibility and Single window of transactions
b) If sell sell-down not achieved, the Underwriting bank must lend the remaining amounts. No risk of under-
subscription for the borrower.
c) Single document/ single contract between the borrower (SPV) and the lead arranger (MLA) of the loan
d) Loan amount is not very large (only HK$ 2275 million, just 16.2% of the total project cost of HK$ 14000
million); but, the certainty of the amount is critical.
e) it is critical because HKTP wants to show the project is viable in the eyes of the international banking
community. It also needs a third party such as the syndicate to properly assess the project's risks and risk
mitigation structure.
f) However, an under-subscription of the loan amount or a failure to subsequently sell down in case of the ‘Best
efforts’ or Consortium will not only delay the closure of the deal and subsequent completion of the project but
also send a non-confidence signal to the international banking community about the risk and success of the
project.
g) It is also critical because there is an additional part of HK$ 1000 million as a nonrecourse revolving
credit facility or contingency fund for working capital overrun. Delay or under-subscription of the
said amount will hurt the additional working capital needed to finish construction or start running
the initial business. So, a commitment to that fund is also crucial for HKTP.
h) It is further critical to insure full commitment to the fund especially because of the recent past
volatility in the Asian banking and financial market. The project needs a long time, 5 years, to
complete the project and during this time, many global financial turmoils may surface, many
revisions of bank fees, market rates, and working capital needs are possible within this period. To
mitigate the related risk, HKTP, therefore, wants to assure the fund from a full underwriter.
Why are you looking at syndication as a potential source of external finance?
a) HKTP is a JV between HK Govt and Disney, Inc – none of their core business is in investment banking or project finance.
They can easily offload the fundraising part through an SPV (HKTP) to a single or multiple Lead Arrangers for securing the
project finance after properly assessing the associated risk structures and undertaking necessary risk mitigation measures.
b) It will be difficult for them to undertake the financing part through Consortium because the consortium will need HKTP to
enter into multilateral agreements with several banks and financial institutes, legal bodies for different terms and conditions of
lending, loan amount, fees, and interest rates. Managing the multilateral engagement throughout the project duration will also
be a tremendous responsibility for HKTP. Instead, a single point, single window, and single document channel such as
Syndication through MLAs is a much better option anytime.
c) Besides, a loan syndicate of 4 MLAs and a number of sub-underwriters will also reduce the risk burden on each underwriter to
as low as only 10% of the total loan amount, which is an industry-standard in this regard. Lower risk of syndication will attract
more investment banks to participate in oversubscribing the loan and help MLAs to easily sell down the commitment to the
lower tiers.
Why have you started organizing external financing so early in the
project development cycle when resort construction would start only in
2002?
a) Structuring and syndication process could take times – six to nine months or more.
b) Recent volatility in the Asian financial market has already created a serious credit crunch. Now, when
the market is showing an early sign of recovery, the HIBOR growth trend is slowing down/ flattening
for the first time in the last 10 years. This is the best time to get a lower interest rate and cost of capital.
Delaying in the process might face another volatility in the market and that might in turn not only
increase the cost of capital manifolds but also wipe out the liquidity from the market.
Why such long maturity?
a) HKTP is committed to serving the debt obligation solely through its FCF. It depends upon the footfall
in the park. However, given the recent volatility in the Asian banking and financial market, HKTP is
not fully confirmed about a realistic forecast of footfall in the park. Therefore, it wants a longer-than-
usual trend of repayment tenure.
b) HKTP wants to build the park in 3 phases depending on CF. It, therefore, wants to use a part of its
operating CF as capital expenditure (capex) for the phased expansion. Consequently, the CF
committed to debt service will be a part of the total CF. It thus may take more time than usual to repay
the entire debt amount.
c) HKTP also does not want to treat the management fees and royalties as subordinate loans, and
therefore needs to reserve an amount to service them out of the total CF. This again will increase the
repayment time.
d) Most importantly, there is a difference between the Contractual maturity pattern and the Behavioural
maturity pattern. Companies or individuals purposefully take a long repayment tenure for debt
services.
e) Because the longer tenure reduces the annual debt service instalment, it usually helps the
borrowers to tackle repayment even under unforeseen adverse situations.
f) However, keeping in mind that the total cost of repayment over the full longer term is much more
than that over the shorter term, borrowers always try their best to settle the debt services as soon as
possible. Here comes the behavioural pattern of loan maturity.
g) Once this behavioural pattern of maturity is superimposed on the contractual pattern, the actual
maturity pattern comes out. No to mention that Disney has already precedence of such actual loan
maturity patterns with Chase and settled debt services within the regular time frame.
h) In the case of HKTP also, although the contractual agreement stands for 15 years, the behavioural
pattern will surely keep the debt service maturity within its regular trend.
Initial Pricing estimation:
Delay in the start of Low * Start of project work (land reclaim & * State's support agreement
construction infrastructure) fully contributed and * Sponsors' support agreement
sponsored solely by HK Govt only * Concession agreement
* Govt also wants to jump-start the project
expecting much-waited job creation at the
end of the recession when the market is
showing signs of recovery, and the end of
the slump in tourism which contrubites
heavily to the country's GDP growth.
HKTP's presentation on Risks identification and proposed mitigations:
Risk of cost/ time Low * Strong and top rated Project * Sponsors' support
overrun Management company with years of agreement
proven track record in this business
will be chosen/involved for better
monitoring and controlling of
activities/ progress.
* A contingency fund of HK$ 1 billion
would be kept aside as a
nonrecourse revolving credit line for
both working capital needs post-
construction and construction cost
overruns.
Regulatory risk Low Design and construction as per laws of the Compliance to Regulatory
land framework
Force majeure risk Low Historically proven as one of the safest places Insurance policy
on earth from any natural calamities including
earthquakes, floods, tsunamis, cyclones, etc.
Environmental risk: land High Need to compensate for and mitigate Environmental policy agreement
reclamation otherwise the possible environmental
damages
THANKS
!