Hongkong Disney Case

Disney's Concern

We believe signing the standard commitment letter is not in Disney's best interest and therefore not advisable. Viewing from Disney's perspective, the 'market flex' provision in the standard commitment letter is significantly detrimental as it inflicts additional market volatility risk and uncertainty to Disney in the syndication process. It entitles Chase to subsequently adjust the features of the Facility including the terms, amount, structure and pricing given a change in Hong Kong Dollar market, which effectively transfers the underwriting risk from Chase to Disney.

If Disney would assume such risks, there is no point in choosing a lead arranger of syndicated loan through a bid, because the least expensive terms proposed are subject to change once interest rate fluctuates. It is somewhat equivalent to best effort, as now the arranger is protected from the risk of not being able to syndicate the loan, whereas the borrower is exposed to it. Disney, who is paying for a fully underwritten in order to avoid such risk, would certainly find this clause undesirable.

Chase's Compromise

From Chase's perspective, we believe the 'market flex' provision is not the only way to address underwrite risk that arises from market volatility. To successfully arrange the loan and maintain good relationship with the borrower Disney when Disney is exceptionally concerned about this clause, compromises can be made to remove this clause, or to alter it in a way that the possible changes would be clipped in a certain range. Many financial instruments such as interest rate swap or interest rate cap can be utilized to hedge Chase's interest risk, so that when the spread required by the market increases, its hedging activities can still provide spread high enough to attract syndicating lenders.

In fact, Disney and Chases did go through a negotiation to guard their own interest, and an agreement was reached between them in the end regarding the 'market flex' provision. They both compromised, as Disney was willing to accept this provision to be included in the commitment letter and Chase agreed to alter the specifications such that if the clause applies pricing is allowed to vary within 25bp while amount is not.

Comparison with Market Adverse Change