The Walt Disney Company’s Yen Financing

1 / 25
About This Presentation
Title:

The Walt Disney Company’s Yen Financing

Description:

The Walt Disney Company s Yen Financing What s the problem? JPY royalties from Tokyo Disneyland had increased significantly during the last year, and Disney ... – PowerPoint PPT presentation

Number of Views:3165
Avg rating:5.0/5.0
Slides: 26
Provided by: mihaEfU

less

Transcript and Presenter's Notes

Title: The Walt Disney Company’s Yen Financing


1
The Walt Disney CompanysYen Financing
2
Whats the problem?
  • JPY royalties from Tokyo Disneyland had increased
    significantly during the last year, and Disney
    foresaw further growth in the years ahead.
  • The JPY had recently depreciated against the USD.
  • Disney had no use for JPY and required USD (or
    perhaps other foreign currencies) for
    construction and expansion of entertainment and
    recreational complexes, production of motion
    picture and television features, and development
    of real estate projects

3
How serious is the problem?
  • During 1984, JPY royalty receipts had been just
    over JPY 8 billion (almost USD 34 million _at_
    average 1984 exchange rate of 237.30 JPY/USD) and
    were expected to grow at 10 to 20 over the next
    few years.
  • This was 11.58 of 1984 operating income before
    corporate expenses (33,712,600/291,033,000), a
    percentage which is likely to grow, since Disney
    itself will probably not grow as rapidly as its
    JPY royalties.
  • A depreciation of the JPY could disrupt Disneys
    financial plans for its large, long-term
    construction, expansion, production, and
    development projects.

4
How likely is the problem?
  • The JPY depreciated against the USD from the 2nd
    quarter of 1984 through the 1st quarter of 1985
    however, it has appreciated in the quarter since
    then.
  • Forward rates indicate that the JPY is expected
    to appreciate against the USD over the next 10
    years, and U.S. inflation has exceeded Japanese
    inflation for the past 5 years.
  • Disney probably does not need to be concerned
    with a depreciation of the JPY however, Disney
    may have to forecast its cash flows so precisely
    that appreciation lower than expected could
    affect the execution of its plans.

5
Unsatisfactory Hedging Alternatives
  • Liquid markets for options and futures contracts
    existed only for maturities of two years or less.
  • Disney obtained quotes for ten years on
    long-dated forward contracts, but bid-ask spreads
    were large, reflecting conservative bank pricing.
    The contracts would be considered part of the
    banks total exposure to Disney, tying up
    valuable credit lines.

6
Debt Structure
  • As of 3/31/85, Disneys debt included 19.75
    unsecured borrowings under revolving line of
    credit and bank term loans, 41.22 commercial
    paper, and 17.56 notes with a maturity less than
    2 years.
  • Only 21.47 of its debt had a maturity greater
    than 2 years, USD 50 million of which is a yen
    term loan due 2/1/93.

7
Money Market Hedge
  • New long-term JPY debt would hedge the JPY
    royalties, and the proceeds could be used to pay
    off some of the short-term debt and diversify the
    maturity structure of Disneys debt.
  • Disney is unable to issue Euroyen bonds under the
    current Japanese Ministry of Finance guidelines.
  • Disney can take out a term loan from a Japanese
    bank.

8
Swaps
  • Disney has already swapped into JPY, USD 50
    million of its USD 75 million Eurodollar notes
    due 3/15/89.
  • Disneys USD 150 million Eurodollar notes due
    1/10/87 are too short-term to have attractive
    swap rates and to provide much of a hedge and
    would provide no new cash to pay off short-term
    debt.
  • Because of a recent Eurodollar note issue and
    Disneys high debt ratio, longer-term Eurodollar
    debt swapped into JPY had been ruled out.
  • Goldman-Sachs is suggesting an ECU Eurobond issue
    swapped into JPY.

9
JPY Term Loan Terms
  • JPY 15 billion principle
  • 10-year term
  • 7.50 annual percentage rate
  • .75 front-end fees
  • Bullet loan - semiannual interest payments and
    principle paid at maturity.

10
JPY Term Loan All-In Cost
  • Time 0 Cash Flow 99.25 (100 less .75 front-end
    fees)
  • Time 1-19 Cash Flows -3.75 (7.50/2)
  • Time 20 Cash Flow -103.75 (100 plus final
    interest payment)
  • Semiannual All-In Cost 3.80423
  • Annual All-In Cost 7.75319 ((1.0380423)2-1)

11
ECU Eurobond Terms
  • ECU 80 million principle
  • 10-year term
  • 9.125 annual percentage rate (applied to the
    beginning of the year balance)
  • Issued at 100.25 of par
  • 2 underwriting fees
  • 75,000 additional expenses
  • Annual interest payments and ECU 16 million
    sinking fund each year 6-10.

12
ECU Eurobond All-In Cost
  • Time 0 Cash Flow 78,498,922 (80M x 1.0025 - 80M
    x .02 - USD 75,000 / .7420 USD/ECU)
  • Times 1-5 Cash Flows 7,300,000 (80 million x
    .09125)
  • Times 6-10 Sinking Fund 16M Times 6-10
    Interest 7.30M (80M x .09125), 5.84M (64M x
    .09125), 4.38M (48M x .09125), 2.92M (32M x
    .09125), 1.46M (16M x .09125) Times 6-10 Cash
    Flows 23,300,000, 21,840,000, 20,380,000,
    18,920,000, 17,460,000
  • Annual All-In Cost 9.47267

13
Bondholders
Bondholders
Swap Structure
ECU
JPY
JPY
JPY
French Utility
Disney
IBJ
6-Month USD LIBOR
6-Month USD LIBOR
ECU
ECU
14
Swap Cash Flows
15
Swap Cash Flow Analysis
  • Disney makes semiannual JPY payments that the IBJ
    passes through unchanged to the French Utility
  • The French Utility makes annual ECU payments to
    the IBJ. These are 50K greater for years 1-6 and
    40K, 30K, 20K, and 10K greater for years 7-10
    respectively than the amounts the IBJ pays to
    Disney. This is how the IBJ earns its fee.
  • The debt swapped by the French Utility is
    existing therefore, it doesnt pay or receive
    anything at time 0. Disney converts the ECU
    proceeds of the bond issue into USD to pay off a
    portion of its short-term debt.

16
Comparative Rates
  • The all-in cost computations show that Disneys
    cost of JPY debt is 7.75391 and cost of ECU debt
    is 9.47267
  • The schedule of its publicly traded Eurobonds
    shows that the French Utilitys cost of JPY debt
    is 6.83 (the yield-to-maturity of its 1/95
    Euroyen bonds) and cost of ECU debt is 9.37 (the
    yield-to-maturity of its 1/95 EuroECU bonds, the
    ECU bonds with a comparable remaining life.

17
Economic Rationale
  • The French Utility has an absolute advantage in
    both currencies debt, but Disney has a
    comparative advantage in ECU in that it has less
    of a disadvantage.
  • Iff Disney borrows in ECU and the French Utility
    borrows in JPY, they pay less combined interest
    than if Disney borrows in JPY and the French
    Utility borrows in ECU.
  • This reduction in total interest can be shared by
    Disney and the French Utility.

18
What makes the swap work in the ECU market?
  • Disney would be only the second U.S. corporation
    to access the ECU Eurobond market.
  • Its bonds would be the first ECU bonds
    incorporating an amortization schedule to repay
    the bonds principle.
  • Three-quarters of ECU Eurobond issuers are
    European, and European sovereigns and state
    agencies, including the French Utility, were
    often perceived by the markets as borrowing ECU
    too frequently and wearing out their welcome
    among the retail purchasers of ECU bonds.
  • Disney has worldwide name recognition.

19
What makes the swap work in the yen market?
  • Disney debt is rated single A, and the French
    Utility debt is rated AAA.
  • What the case does not say is that Japanese
    government regulations made public issuance of
    unsecured JPY debentures by foreign companies a
    slow and cumbersome process and available only to
    the highest quality debtors.
  • This is the reason Disney was ineligible to issue
    Euroyen bonds and also the reason Disney was
    ineligible to issue Samurai Bonds, which are
    foreign bonds issued in the domestic Japanese
    bond markets.

20
Disneys Benefit
  • Disneys proceeds from its bonds, ECU 78,498,922,
    are worth JPY 14,445,057,631 at the current
    exchange rates of .7420 USD/ECU and 248 JPY/USD.
  • We can regard this as the JPY benefit that Disney
    will receive in exchange for the JPY payments it
    will be making.
  • The IRR of these cash flows, 7.01034, is
    Disneys cost of JPY debt as a result of the
    swap.

21
French Utilitys Benefit
  • If we view the JPY payments the French Utility
    will be receiving as the payments on a JPY debt
    at its current 6.83 cost of JPY debt, then the
    face value of this hypothetical debt would be JPY
    14,591,732,744.
  • This is the present value of the JPY benefits the
    French Utility will be receiving, which is equal
    to ECU 79,296,000 at the current exchange rates
  • We can regard this as the ECU benefit that the
    French Utility will be receiving in exchange for
    the ECU payments it will be making.
  • The IRR of these cash flows, 9.34981, is the
    French Utilitys cost of ECU debt as a result of
    the swap.

22
Swap Summary
  • Disney reduces its cost of JPY debt from
    7.753129 to 7.01034, 74.28 basis points. This
    is a substantial benefit.
  • The French Utility reduces its cost of ECU debt
    from 9.37 to 9.34981, 2.02 basis points. This
    is a very tiny financial benefit, so there must
    have been other reasons why it entered into this
    swap.
  • IBJ gets ECU 50K per year for 6 years, and then
    ECU 40K, 30K, 20K, and 10K for the next 4 years.
    This is a low fee, but it was co-lead manager for
    Disneys ECU Eurobond issue.

23
What did Disney do?
  • Disney did issue and swap the ECU Eurobonds. The
    deal was sufficiently well received that it was
    followed by a second ECU note offering in 12/85.
  • Disney subsequently issued 10-year CHF notes and
    3-year AUD notes and swapped them into JPY.
  • In 4/88 Disney discounted an undisclosed amount
    of its JPY royalties (representing most of its
    JPY income for the next 20 years, according to
    its 1988 annual report) for USD 723 million.

24
Should Disney have hedged?
  • In 1985, there was ample evidence (based upon
    purchasing power parity) that the JPY was
    overvalued, and it had already begun to
    appreciate.
  • Disney may have made an overly conservative
    response to the preceding depreciation of the
    JPY.
  • BUT the point of hedging is to insure against
    unexpected exchange rate movements, and the
    expected appreciation of the JPY should have been
    reflected in the rates at which Disney swapped.
    Perhaps Disney was so dependent upon the cash
    flows from Tokyo Disneyland financing its other
    projects, that it couldnt risk any shortfalls
    from their expected values.

25
(No Transcript)
Write a Comment
User Comments (0)