Ocean Park: Thrills but no spills

The HK$4.16 billion ($537 million) project facility for the HK$5.55 billion Ocean Park redevelopment in Hong Kong closed over 100% oversubscribed, reflecting the strength of the credit and the appeal of the leisure park's story to the bank market. The deal is notable both for not featuring any equity and for creatively exploiting the Hong Kong Special Administrative Region government's involvement.

Ocean Park, a theme park owned by the HKSAR, is spending HK$5.55 billion on an extensive redevelopment, which includes adding more animal attractions, and realigning the park to avoid competition with Hong Kong Disneyland. The redevelopment is also designed to attract more visitors to the south side of Hong Kong Island.

The project benefits from heavy HKSAR government involvement. The SAR has put together a HK$1.387 billion 25-year subordinated term loan, and is providing the guarantee for a HK$1.387 billion 15-year tranche A facility. The remainder of the cost is met through uncovered non-recourse tranche B facilities, comprising a 15-year HK$2.275 billion term loan facility and a HK$500 million revolving credit. The borrower has the option of converting the revolving facility into a term loan.

Tranche A was priced at 25bp over Hibor, and the non-recourse portion offered an initial margin of 70bp over Hibor for years 1-5, stepping up to 75bp for years 6-10 and 80bp for years 11-15. The average all-in margin across all facilities is roughly 60bp.

The mandated lead arrangers Bank of China, DBS Bank and HSBC kept HK$600 million each across both tranches. The syndication effort was helped by the by the fact that the risk weighting of the debt benefited from the classification of Ocean Park as a public sector entity (0% under BIS rules).

Ten banks joined as lead arrangers, including China Development Bank, which took HK$300 million, Royal Bank of Scotland, with HK$210 million, and China Construction Bank, with HK$147.5 million.
BNP Paribas, Citic Ka Wah Bank, Dah Sing Bank, Hang Seng Bank, HSH Nordbank, Sumitomo Mitsui Banking Corp and United Overseas Bank all committed HK$145 million at the same level. Fortis Bank took the arranger ticket and HK$95 million.

At the senior manager level, Credit Industriel et Commercial lent HK$80 million and Shanghai Commercial and Savings Bank, Tai Fung Bank and Wing Hang Bank supplied HK$70 million each. Bank of China (Macau), Bank of East Asia and Bank of Tokyo-Mitsubishi UFJ each committed HK$55 million.

International Bank of Taipei and Unicredito Italia took HK$40 million as managers, while Bangkok Bank and Wing Lung Bank took HK$30 million and the same title.

The government's involvement – this is the first time it has guaranteed a commercial loan – was the subject of intense negotiations. As a key objective of the structuring, the SAR's commitment (the subordinated loan plus guarantee) is limited to 50% of the project costs and its involvement does not extend to completion and cost overrun guarantees.

To balance the absence of such guarantees, the mandated lead arrangers negotiated a solution that takes advantage of the government's lower cost of funding and longer maturities, by drawing on the government funding first. The redevelopment project utilises the government funding to complete the core infrastructure first, before the disbursement of the non-recourse debt. The risks borne by commercial lenders in not having cost overrun guarantees are mitigated by a drawdown and monitoring mechanisms and financial and commercial covenants that force discipline on the borrower.

Nevertheless the structure does give the borrower flexibility to adjust the scope of the redevelopment plan, and it may, if it so wishes, raise financing for future hotels, since the park's cashflows are effectively ring-fenced to service the redevelopment financing.

The proceeds will be specifically used to build upon Ocean Park's 'Sea World' theme, with the park extended on land currently owned by a driving school at Wong Chuk Hang. Core infrastructure includes a new entry plaza, with a direct pedestrian link to a new Ocean Park station, on the South Island line.

Various attractions will be built over the next five to six years, including a Balloon show and Vet hospital in 2007; Birds of paradise in 2008; Aquarium and Rainforest in 2009; Polar adventure in 2010 and cable car upgrade by 2012. Once completely redeveloped the park will be split into two major areas, 'The Waterfront' and 'The Summit', and the number of attractions will have more than doubled from 35 to over 70.

The construction plan, which began in the last quarter of 2006, will be carried out in eight discrete stages to minimise disruption to existing facilities. The project is expected to bring significant economic benefits, forecast to be worth over HK$40 billion over the next 40 years, and create around 12,000 jobs by 2022.

The involvement of the HK government clearly gave lenders a warm glow of security, but the underlying existing asset is still attractive. Despite being nearly 30 years old, and despite competition from HK Disneyland, more than 1 million customers visited Ocean Park between 1 July and the end of August 2006 – a summer record. With the redevelopment financing in place and construction having begun, successive attendance records are likely.

Ocean Park Corporation
Status: Syndication closed 13 June 2006
Size: HK$5.5 billion
Location: Hong Kong
Description: Financing for government owned theme park, one third of the financing covered by a government guarantee
Sponsors: Ocean Park, Hong Kong SAR
Debt: HK$4.16 billion ($537 million)
Mandated lead arrangers: Bank of China, DBS Bank, HSBC
Borrower legal counsel: Johnson Stokes & Master
Lender legal counsel: Clifford Chance