RJR case Essay

5843 Words Oct 5th, 2013 24 Pages
Harvard Business School

Rev. August 7, 1995

RJR Nabisco - 1990
In the spring of 1990, the firm of Kohlberg Kravis Roberts & Co. (KKR) was in negotiation with lenders regarding the refinancing of a $1.2 billion bridge loan due to be repaid in full by
February, 1991. The bridge loan was part of the $24 billion financing of KKR's leveraged buyout of
RJR Nabisco in early 1989. Originally, KKR had planned to retire the loan with the proceeds of a $1.25 billion public offering of senior debt. However, in December, 1989, Moody's failed to give the issue an investment-grade rating. Moody's also down-graded RJR's other debt, a move that triggered substantial declines in the market prices of RJR's securities. Faced with an
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A second alternative was to raise internal funds for a bond buyback through the sale of additional assets—the most marketable of which were believed to be RJR's U.S. food businesses, estimated to be worth over $12 billion (see Exhibit 3). However, this was one of KKR's least attractive alternatives, since its strategy was to develop rather than liquidate RJR's major food businesses.
Moreover, asset sales would generate substantial capital gains taxes, estimated to be around 20% of gross proceeds for the food businesses, and 30% for the tobacco businesses.
As a third possibility, KKR could try to renegotiate the terms of the reset bonds or give holders the opportunity to exchange their bonds for equity and other securities.
Any of the above approaches would have the effect of reducing or eliminating the number of reset bonds outstanding. Many argued that a reduction in the supply of these bonds would create value in and of itself, since they accounted for over 60% of the high-yield PIK bond market. In other words, conditions of oversupply and not necessarily poor fundamentals could have been causing the depressed prices of the reset bonds.5 Some bolstered this view that the company was basically healthy by pointing out that the equity warrants were trading above their initial book value of $5 per share.6 Ibid.

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