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1、CasesinFinancialEngineeringInstructor:ChenMiaoxinTheCaseofRJRNabiscoHoldingCapitalCorporation2Reference:RobertM.Dammon,KennethB.Dunn.AndChesterS.Pratt.1993.TheRelativePricingofHigh-YieldDebt:TheCaseofRJRNabiscoHoldingsCapitalCorporation.theAmericanEconomicRevie
2、w,83(Dec.)PartOne:BackgroundBackground1Thefirmknownin1991asRJRNabiscowasadescendantofthetobaccofirmR.J.Reynolds,foundedin1875.Throughacquisitionsinthe1960s,thetobaccofirmenteredavarietyoffoodbusinesses.Afterits1985merger,thefirmwasrenamedRJRNabisco.5Background2
3、Inthelate1980sthefoodproductsindustryexperiencedmassiveconsolidationthroughmergers.In1988twomainbiddersproposedtotaketheRJRNabiscoprivateinaleveragedbuyoutcontest:TheManagementGroupKohlberg,Kravis,Roberts&Co.(KKR),afirmspecializinginleveragedbuyouts6Background3
4、Attheendofabiddingwar,KKRprevailedbyofferingshareholders$81pershareincashplusapackageofbondsvaluedat$28.ThedaybeforethefirstannouncementofapossibletakeoverforRJRNabisco,itsstockhadtradedat$77.25.Thus,KKRofferedcommonshareholdersa41%premiumoverthefirm’spre-takeo
5、vervalue.Tofinancethebuyout,KKRincreasedRJR’sdebtfrom$5billionto$29billion.7Background4Thenewfirmwasstructuredasaseriesofholdingcompanies.Eachoftheserelatedentitieshadseparateobligations,issuedeitherinconjunctionwiththeacquisitionor,inthecaseofRJRNabisco,Inc,th
6、eoperatingcompany,carriedoverfromthetaken-overfirm.8PartTwo: DescriptionofSecuritiesIssuanceInMay1989,RJRholdingsCapitalCorporationissuedthreenearlyidenticaldebtsecuritiesinconnectionwiththeleveragedbuyoutofRJRNabiscobyKKR$1.0billionof15-percentpayment-in-kinds
7、ubordinateddebenturesdue2001(pay-in-kindbond)$4.1billionofsubordinateddiscountdebenturesdue2001(deferred-couponbond)$525millionof13.5-percentsubordinateddebenturesdue2001(cash-payingbond)101112DifferenceThemajordifferenceamongthethreesecuritiesistheforminwhichi
8、nterestispaid.13Thedifference1The13.5-percentcash-payingbondpaysinterestincash.Thebankruptcyclaimofthecash-payingbondisparplusaccruedinterest.14Thedifference2AfterMay15,1994
