The Walt Disney Company’s Yen Financing
Background:
The Walt Disney Company is an international company headquartered in Burbank, California, founded by Walt and Roy Disney in 1938. Disney has grown vastly since it was founded, and now its operational areas included entertainment and recreational complexes, produced motion picture, television features and developed community real estate projects. The Walt Disney Company operated the Disneyland theme park in California, and the Walt Disney world destination resort in Florida, which included seven principal theme areas, hotels, and other recreational facilities designed for the whole family. The company also produced motion pictures for the theatrical, television, and home video markets for the world, targeted at younger audience, teenagers and young adults. In addition, the company acquired Arvada Corporation in 1984 and developed distinctive report and home communities in Florida.
Since 1983, The Walt Disney Company started to receive royalties, paid in yen, from Tokyo Disneyland, which was operated by an unrelated Japanese company. Total entertainment and recreation revenues, including royalties from Tokyo Disneyland, increase 6% to 1.1 billion in the end of September 1984.
Problem:
Besides the domestic revenues generated from entertainment and recreational complexes, produced motion picture, television features and develop community real estate projects, the Walt Disney Company also had large inflow of yen royalty receipts from Tokyo Disneyland opened in April 1983. According to Mr. Anderson’s expectation, yen royalty receipts will grow at 10% to 20% per year over the next few years. Since there was a future fluctuations in the yen/dollar spot rate, especially in the situation that the value of yen already depreciated 8% during last year, how to hedge future yen inflows become a big problem for Walt Disney Company.
Alternatives
Disney has several of options on how to treat the future revenue streams in Japanese Yen. Since Mr. Anderson already has expressed his worry over the recent depreciation of the Yen to the US Dollar, in combination with the increasing size and importance of the revenue stream from Japan, the option to do nothing and be fully exposed to foreign exchange risk is already out of the picture. These are the remaining options considered:
Foreign Exchange Options
Foreign Exchange Futures
Foreign Exchange Forwards
Swap existing US debt to Yen debt, exchanged at current spot – to be repaid with proceeds in Japan: Disney would enter into a long term bullet loan for a total of 15 billion Yen with interest of 7.50% paid semiannually and an additional front-end fee of 0.75%.
Enter into a Swap contract designed by Goldman Sachs: Disney would in this contract issue a ten-year ECU80 Million Eurobond at 100.25% of par, with a 9 1/8% coupon and 2% underwriting fee. A cap of additional fees was set to $75,000. Further the Eurobonds would have an annual sinking fund payment of ECU16 Million from the sixth year to maturity. Goldman Sachs would then help arrange an ECU/JPY swap through a Japanese bank – IBJ – with a French Utility company. Please refer to the picture below for a simplified version of the structure:
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Disney first receives ECU from bond investors. Over time Disney will generate cash inflows in Yen, which it transfers to IBJ, who transfers them to the French utility who can pay interest on its debt and/or pay down some of the debt. The French utility in turn transfers ECUs to IBJ (like an exchange for the Yens) that are transferred from IBJ to Disney. Disney can then use these to pay coupons to its bondholders.
Mr. Anderson rejected the three first options, due to several reasons, including the fact that he didn’t know how far into the future to hedge – in fact there was only a liquid market up until two years for the options and futures contracts. Although Mr. Anderson had obtained quotes on forward contracts for a ten year