RJR case Essay

5849 Words Nov 3rd, 2013 24 Pages
Harvard Business School

9-290-021
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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Except for the stumbling block created by Moody's downgrade, the plan had proceeded as forecast: through March 31, 1990, asset sales (Exhibit 2) and cash flow met or exceeded targets and all required debt payments were made. 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. With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan. 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). First, the firm could try to raise external funds and repurchase all or a portion of the PIK reset bonds. In recent times, many companies had been repurchasing their "junk" securities: $2.5 billion alone in the first quarter of 1990, versus $5.5 billion in 1987, 1988, and 1989 combined.4 Potentially, the funds for a bond buy-back could come from additional bank borrowings and/or the sale of equity, preferred stock, or other securities. An often mentioned source of money was KKR's LBO fund, which still had several billion dollars available for investments (described more fully below). How many of the reset
bonds

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