The Walt Disney Company’s Yen Financing Case

Team 10

Steven Lambe Fred Patet Petr Khalfen

Yunyun Xu Ashmita Srivastava

Established in 1923 by Walt & Roy Disney

Largest Media Conglomerate Today

Component of DJIA & S&P500

The Walt Disney Company

Areas of Operations

Movies Music Disneyland Theme Parks Resorts Recreational facilities Restaurants Hotels Games Consumer Products; etc.

Financial Overview (1984)

1982 1983 1984$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

Revenue

Costs and Expense

Income(Loss)Before Corporate Expenses and Unusual Charges

Corporate Expenses

Net Income

Financial development

Total Assets & Borrowings

Total Asset Borrowing0

500000

1000000

1500000

2000000

2500000

3000000

19831984

+244%

Net Income, Total Assets , Consolidated Revenues Borrowings & Corporate expenses

Operating profit before corporate expenses for entertainment & Recreation segment

Financial Overview (1984)

Disneyland,

Japan

Royalties in Yen

Currency Exchange Rate Risk

Main Problem

Reasons for Hedging

1980

1981

1982

1983

1984

I

1984

II

1984

III

1984

IV

1985

I

1985

II200

210

220

230

240

250

260

270

225.7

220.1

248.3

237.4

230.8229.7

243.6246.1

257.5

250.8

Historical Exchange rate of Yen/Dollar

Yen/Dollar

1984 1985 1986 1987 1988 1989 1990

0.00

5.00

10.00

15.00

20.00

25.00

10% Growth

10% Growth20% Growth

Expected Growth in Yen Royalties

Hedging Strategies

Currency options

Forward Contract

Futures Contract Swap

Foreign Currency loan

Hedging method Advantages Disadvantages

Options •Flexibility•Low transaction cost•Leverage

•Short Term Hedge •Up-Front premium

Futures •Standardized contracts•High liquidity•Low Transaction cost

•Short Term Hedge•Difficult to customize•Initial Margin

Forwards •Long Term Hedge •Negotiable size•No Initial Margin

•Limits upside potential•High Bid Ask spread•Counterparty Risk

Term Loan •Spot exchange rate•Long Term Hedge•High Leverage

•Balloon payment at the end•High Debt•Expensive

Swap •Long Term Hedging•Flexibility•Off Balance Sheet Transaction

•No upside potential•Low Market Liquidity•Counterparty Risk

Hedging method Recommendation Reason

Options Not Recommended Doesn’t provide long term hedge

Futures Not Recommended Doesn’t provide long term hedge

Forwards Not Recommended Bank requires

Term Loan Recommended Disney can borrow ¥ 15 billion

Swap Recommended Disney can swap ECU

Yen Bullet Loan

10-year Loan

0.75% Front-end

fees

Semiannual interest

payments & principle paid at

maturity.

7.50% Annual

Percentage Rate

Yen Bullet Loan

IRR= 7.753%

1. ECU 80 million ten-year Eurobonds at 100.25% of par, 9.125% coupon, 2% underwriting fees.

2. ECU/¥ swap intermediated by Industrial Bank of Japan (IBJ)

3. French state-owned utility interested in swapping yen debt for ECU debt

Goldman Sachs’ Proposal

ECU/Yen SWAP with

French Utility

ECU 80 Million

loan

Fees 2%

Expenses $75,000

USD/ECU

0.7420

Coupon 9.125%

Price 100.25%

ECU/Yen SWAP with French Utility

IRR=7.010%

Best Choice - ECU/Yen Swap

ECU/Yen Swap -

IRR: 7.010%

Yen Loan - IRR:

7.753 %

Conclusion & Recommendation

Why ECU Yen/ Swap?• Cost reduction of

0.743%

The Walt Disney

Company

• In total it makes ECU 400,000

Industrial Bank of Japan

• Cost reduction of 0.28%French Utility

• Single payment of 1.6 Million ECU (2% Fees)

Goldman Sachs

The Walt Disney Co. Accepted Goldman Sachs Proposal with ECU/Yen swap.

It was followed by a second ECU note offering in December 1985.

Disney began engaging in more foreign currency swaps in order to take advantage of attractive borrowing rates.

What actually happened-

QUESTIONS ?