RJR NABISCO CASE STUDY SOLUTION PPT

There was considerable speculation as to how KKR might try to deal with the reset problem, the resolution of which had now become intertwined with the bridge loan refinancing. The Fixed Rate will be equal to a rate determined by Holdings’ financial advisors, on the one hand, and Dillon and Lazard, on the other hand, designed to result in the Debentures trading at par on a fully distributed basis, without giving effect to the conversion feature of the Debentures. Tobacco-related Litigation During the s, investors were concerned that the tobacco companies would be hit with large product liability damage awards. With respect to the reset provision however, KKR faced a richer array of alternatives, although just about any financial restructuring would require the consent of the banks in view of the tight restrictions imposed by the Credit Agreement discussed below. In other words, conditions of oversupply and not necessarily poor fundamentals could have been causing the depressed prices of the reset bonds.

Domestic and International Remaining liquidation value Dollars in millions. As causes, various observers cited the troubles and ultimate bankruptcy of Drexel Burnham Lambert, the savings and loan crisis, the financial distress of Campeau Corporation, and fears that economic recession would trigger numerous junk bond defaults. Exhibit 1 details the composition of long-term debt, including initial amounts issued with respect to buyout-related debt and amounts outstanding on March 31, The reset provision is substantially identical to that of the Senior Converting Debentures described above. Kohlberg had done his first LBO in Payment of such fees began soon after the fund closed and were intended to continue on uninvested funds for a six-year commitment period.

An often mentioned source of money was KKR’s LBO fund, which still had several billion dollars available for investments described more fully below. Under pressure from their constituencies, university endowments and public pension funds were beginning to divest themselves of tobacco securities. Analysts thought RJR would be within this 1: Partnership Debt Securities due Callable at par at any time.

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The RJR Nabisco Case Study Solution

The state district court judge in Texas agreed with plaintiffs’ contention that the LBO was a fraudulent scheme designed to shield the company from asbestos litigation. Callable in at After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures.

Subordinated Floating Rate Notes due Subordinated Extendible Reset Debentures due While KKR did not promise such returns in the future, investors clearly hoped such would be the case.

In recent times, many companies had been repurchasing their “junk” securities: The debentures must at some point be reset to a fixed rate to maturity. If they did not recover and the reset proved infeasible, KKR could then try to negotiate with the bondholders and banks, or seek Chapter 11 protection, or both.

KKR had put its money where its mouth was, something the management group had been unwilling to do. Upon election to extend maturity, interest rate must be reset to obtain a bid value ofbut must be in the range of Payment of such fees began soon after the fund closed and were intended to continue on uninvested funds for a six-year commitment period.

rjr nabisco case study solution ppt

The case, still undecided as of March,rested on xolution “negative pledge” covenants in the bond indentures that required that the bonds to be secured “equally and ratably” with other lenders, including the banks. However, in December,Moody’s failed to give the issue an investment-grade rating.

Tobacco revenue was projected to grow at 8. Registered, but not listed on an exchange. Roberts, then 50, 32, and 33 years old, respectively. The relatively optimistic outlook for RJR’s tobacco businesses was not without considerable uncertainty.

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rjr nabisco case study solution ppt

The reset bonds came into being as ptp “cram-down” securities in the RJR buyout. Capital expenditures Increase in working capitalg Plus: With a “substantially equivalent” opinion from its financial advisors, the board felt free to evaluate the offers based on other considerations.

rjr nabisco case study solution ppt

These were the PIK reset bonds. Thus far, RJR and other tobacco companies had been quite successful in defending themselves in such lawsuits.

rjr nabisco case study solution ppt

Thus far, KKR had liquidated many of its earlier investments within three to seven years of making them. The December 31, balance sheet, revised in the April 5, KKR proxy statement to stockholders to show the projected result of the leveraged buyout.

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With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan. Moody’s also down-graded RJR’s other debt, solutiion move that triggered substantial declines in the market prices of RJR’s securities. Fees charged on other large deals as a percentage of the total transaction in parentheses were: The reset provision is substantially identical to that of the Senior Converting Debentures described above.

Faced solutiion an unreceptive public market, KKR withdrew the debt offering and began discussions with RJR’s lending banks.