First, the firm could try to raise external funds and repurchase all or a portion of the PIK reset bonds. Under pressure from their constituencies, university endowments and public pension funds were beginning to divest themselves of tobacco securities. The reset bonds came into being as the “cram-down” securities in the RJR buyout. Failure-to-warn cases focused on the years prior to when federal law began to require that consumer warnings be printed on cigarette packaging. The reset provision is substantially identical to that of the Senior Converting Debentures described above.

Estimates by Salomon Brothers, May 16, 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. Cash Flow Net Income Add back: First maturity in , but can be extended each year for one year up to final maturity in Thus far, RJR and other tobacco companies had been quite successful in defending themselves in such lawsuits. 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 balance sheets on December 31, and March 31, are those of the consolidated entity.

Domestic and International Remaining liquidation value Dollars in millions. With respect to the reset provision however, KKR faced a richer array of alternatives, although just about any sfudy restructuring would require the consent of the banks in view of the tight restrictions imposed by the Credit Agreement discussed below.

Failing such a reset, the bonds would become due and payable almost immediately.

Rjr nabisco case study solution ppt presentation

Listed on the New York Stock Exchange. Indentures required that on or before April 28,RJR reset the rate so that the stdy would trade at par see Exhibit 1. In March,there were 31 product liability cases pending against RJR; compared to 97, 69, and 48 such cases at the end of, andrespectively.


rjr nabisco case study solution ppt

Exhibit 1 summarizes this structure and describes the various securities issued by each of these entities. In recent times, many companies had been repurchasing their “junk” securities: As the pre smoking population aged, the number of failure-to-warn cases declined over time.

Payment of such fees began soon after the fund closed and were intended to continue on uninvested funds for a six-year commitment period. With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan. Increasing Rate Notes due Thus far, KKR had liquidated many of its earlier investments within three to seven years of making them.

Assets that are planned to be sold are included at estimated fair market value under “Net assets available for sale. Amortization Depreciation Non-cash interest Less: Any of the above approaches would have the effect of reducing or eliminating the number of reset bonds outstanding.

rjr nabisco case study solution ppt

Callable at a small premium to par on any interest payment date. Partnership Debt Securities due After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures. KKR’s strategy for servicing this debt rested on asset sales and improved internal cash flow.

rjr nabisco case study solution ppt

An often mentioned source of money was KKR’s LBO fund, which still had several billion dollars available for investments described more fully below. Callable in at Exhibit 5 also gives a cash flow analysis based on the above projected shudy results.

rjr nabisco case study solution ppt

However, this was one of KKR’s least attractive alternatives, since its lpt was to develop rather than liquidate RJR’s major food businesses. First maturity inbut can be extended each year for one year up to final maturity in Figures do not take into account capital gains taxes.


The latter PIK bonds did not have a reset feature, however. KKR also believed it could insulate the company and nabico from legal liability by selling the Jim Walter holding company and thereby rid itself of the problematic Celotex subsidiary, while retaining the operating assets under the newly-organized Hillsborough Holdings Corporation.

While many went along with the proposal, there were a number of holdouts, including Fidelity Investments, which turned a deaf ear to the personal pleas of Henry Kravis. Operating Projections Historically, RJR Nabisco’s tobacco operations provided just over half of the company’s sales and about three fourths of its profits.

Rjr nabisco case study solution ppt presentation

Perold as the basis for class discussion rather that to illustrate either effective or ineffective handling of an administrative situation. Analysts thought RJR would be within this 1: Capital expenditures Solutkon in working capitalg Plus: Conceivably, with an external funds zolution, it might not even be necessary to repurchase any of the bonds, since a strengthened balance sheet might give sufficient boost to their values.

Subordinated Discount Debentures due 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.