Slepy Beruty Case

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School of BusinessApril 2004

Walt Disney Industry’s Sleeping Beauty Bonds – Duration Analysis*

In July 93, the Walt Disney Company issued $300, 000, 1000 in senior debentures (bonds). The debentures carried an interest rate of 7. 54%, payable semiannually, and had been priced at " par”. They were due to always be repaid on July 15, 2093, a complete one hundred years after the date of concern. However , in the company's alternative, the debentures could be repaid (in entire or in part) at any time after This summer 15, 2023 or 30 years after the concern date.

Beauty, the fairy tale queen and heroine of a well-liked Disney cartoon film, relating to star, slept beneath enchantment in a magic fortress for one hundred years. The Disney 100-year debentures were right away dubbed the " Sleeping Beauties. ”

The issue triggered a lot of comment amongst traders of portfolio managers.

" It's crazy, ” explained William Low, head of fixed-income purchases at Piper Capital Supervision Company. " Look at the path of Coney Island over the last fifty years and see what happens to amusement parks. ”[1]

Scott Jacobson, head of fixed-income research at Piper Capital Management, believed that the a genuine were too risky pertaining to his consumers, but " if business treasurers can get away with it, obtain? ”[2]

Other viewed the good sales with the bonds like a vote of confidence inside the Disney Company and U. S. economy policy. " It demonstrates that people imagine the Mouse button will still be vocal and dancing in a century, ” said Tom Deegan (head of corporate sales and marketing communications at Disney).[3] And Joe Greenspan, Chairman of the Government Reserve Panel of Governors called the bonds " one of the more significant indicators the fact that long-term inflation expectations that have so bedeviled our economy and economic markets appear to be receding… a great sign. ”[4]

As long lasting interest rates dropped in 1992 and 93, companies and investors started to show restored interest in very long-term maturities. The Tennessee Valley Expert (a government-owned hydroelectric electric power company) distributed a 50-year bond in April 1992. Ford, Boeing, Texaco and Conrail implemented with their very own 50-year problems (irreverently named " Methuselah” bonds) in 1993.

The Disney provides were the first 100-year bonds being issued seeing that 1954, if the Chicago & Eastern Railroad (a subsidiary of Union Pacific) released 5% provides due in 2054. Nevertheless , the prize for longest lasting the liability went to the Canadian Pacific Corporation, which was paying 4% on a 1000-year bond, given by the Barcelone Grey and Bruce Railway in 1883, and as a result of be repaid in 2883![5]

The idea pertaining to the 100-year bond originated in an institutional investor. Since reported in the Wall Street Journal, an institution acknowledged Morgan Stanley with a request a 100-year corporate connection to harmony its immediate holdings and lengthen the duration of its portfolio. Hence, according to just one reporter, the 100-year provides " had been conceived simply by quantitative experts tucked away in cramped rooms crowded with computer displays. ”[6]

The matter was listed on September 20, 93 to yield 0. 95% (95 basis points) above the benchmark 30-year Treasury Relationship. Analysts approximated that this was. 15% to. 20% much more than Disney may have paid acquired it given 30-year a genuine. And Disney had the justification to call the bonds following 30 years intended for 103. 02% of face value. Therefore thirty years therefore, the company had the best of both planets. If prevailing interest rates were low, it might call the bonds and replace them with a cheaper issue. But if interest levels were substantial, the bonds could stay out, continuing to spend 7. 54%, for 60 to 70 more years!

Require was so brisk the company bending the size of the matter from $150 million to $300 million. Merrill Lynch, co-manager from the Disney providing, perceived a great overflow interesting for very-long-maturity bonds. In respect to Grant Kvalheim, a managing representative at Merrill...