The indentures of the Increasing Rate Notes and the Subordinated Debentures allowed considerably more leeway regarding the issuance of additional debt and the uses of cash. For example, without the banks’ permission, funds raised through an equity issue by Holdings could not be used to buy back junior debt. The debentures must at some point be reset to a fixed rate to maturity. Callable at a small premium to par on any interest payment date. The reset provision is substantially identical to that of the Senior Converting Debentures described above. The relatively optimistic outlook for RJR’s tobacco businesses was not without considerable uncertainty. Subordinated Discount Debentures due
Under pressure from their constituencies, university endowments and public pension funds were beginning to divest themselves of tobacco securities. Many participants in the fund had invested money with KKR since the beginning of the decade. On April 12, , RJR discontinued its practice of buying tobacco liability insurance, becoming self-insured for all tobacco-related product liability risks. Exhibit 5 also gives a cash flow analysis based on the above projected operating results. 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.
However, this was one of KKR’s least attractive alternatives, since its strategy was to develop rather than liquidate RJR’s major food businesses. Faced with an unreceptive public market, KKR withdrew the debt offering and began discussions with RJR’s lending banks.
The balance sheets on December 31, and March 31, are those of the consolidated entity. 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. In recent times, many companies had been repurchasing their “junk” securities: 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, If they did not recover and the reset proved infeasible, KKR could then try to negotiate with the bondholders and banks, cqse seek Chapter 11 protection, or both.
Failure-to-warn cases focused on the years prior to when federal law began to require that consumer warnings be printed on cigarette packaging. Subordinated Floating Rate Notes due The projections show there being ample cash available to make required debt repayments in and Thus far, KKR had liquidated many xase its earlier investments within three to seven years of making them.
Rjr nabisco case study solution ppt presentation
If Holdings’ financial advisors, on the one hand, and Dillon and Lazard, on the other hand, are unable to agree on the Fixed Rate within three business days, Holdings’ financial advisors, on the one hand, and Dillon and Lazard, on the other hand, shall appoint an independent nationally recognized investment bank to determine the Fixed Rate and such determination by such bank shall be final.
The majority of the existing debt was secured “equally and ratably” with the bank debt, while some existing debt was actually junior to the banks’ claims.
The reset bonds came into being as the “cram-down” securities in the RJR buyout. Nabidco Extendible Reset Debentures due The Relative Pricing o For example, without the banks’ permission, funds raised through an equity issue by Holdings could not be used to buy back junior debt.
Analysts thought RJR would be within this 1: KKR’s strategy for servicing this debt rested on asset sales and improved internal cash flow. Already there was a complete ban on smoking on domestic flights, and numerous state laws were restricting smoking in the work place. Failing such a reset, solurion bonds would become due and payable almost immediately.
While KKR did not promise such returns in the future, investors nabidco hoped such would be the case. Tobacco revenue was projected to grow at 8. On or prior to April 28,RJR must set a fixed rate to maturity on the debentures. In other words, conditions of oversupply and not necessarily poor fundamentals could have been causing the depressed prices of the reset bonds.
After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures.
Rjr nabisco case study solution ppt presentation
The raison d’etre of the Bank Credit Agreement was primarily to ensure that the banks were paid off nabiscco of anybody else; exceptions to this principle were few. These projections are in the mid-range of those of Wall Street analysts who were closely following the RJR situation. Callable at a small premium to par on any interest payment date.
Moody’s also down-graded RJR’s other debt, a move that triggered substantial declines in the market prices of RJR’s securities. Under pressure from their constituencies, university endowments and public pension funds were rmr to divest themselves of tobacco securities. Plaintiffs’ arguments, by and large, fell rur two general camps: However, in December,Moody’s failed to give the issue an investment-grade rating. Upon election to extend maturity, interest rate must be reset to obtain a bid value ofbut must be in the range of No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.
First, the firm could try nabosco raise external funds and repurchase all or a portion of the PIK reset bonds.