Many participants in the fund had invested money with KKR since the beginning of the decade. Domestic and International Remaining liquidation value Dollars in millions. Amortization Depreciation Non-cash interest Less: Failure-to-warn cases focused on the years prior to when federal law began to require that consumer warnings be printed on cigarette packaging. Cash Flow Net Income Add back:

In subsequent years, KKR obtained ever greater commitments from its growing stable of investors. At the time, the company was embroiled in numerous asbestos-related product liability lawsuits stemming from the manufacture of asbestos building materials by the company’s Celotex Corporation subsidiary. Listed on the New York Stock Exchange. The reset bonds came into being as the “cram-down” securities in the RJR buyout. Callable in at

While there had been court decisions against the tobacco companies, none of any significance stood on appeal. After the equity of Holdings, the most junior securities were the Senior Converting Debentures followed by the Exchange Debentures.

Food sales were forecast to grow at 8. 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. Subordinated Extendible Reset Debentures due The market obviously saw substantial risk that the reset would fail, which would put RJR in violation of its bond covenants.

In recent times, many companies had been repurchasing their “junk” securities: Partnership Debt Securities due 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. Harvard Business School Rev. An often mentioned source of money was KKR’s LBO fund, which still had several billion dollars available for investments described more fully below.


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Studdy arguments, by and large, fell into two general camps: Pre-buyout Debt Bank Debt Optional debt repayments: Due in 16 quarterly installment payments beginning in May Under pressure from their constituencies, university endowments and public pension funds were beginning to divest themselves of tobacco securities.

However, this was one of KKR’s least attractive alternatives, since its strategy was to develop rather than liquidate RJR’s major food businesses. How many of the reset bonds would have to be repurchased was not obvious. Exhibit 5 gives projections of RJR Nabisco’s operating results for the years — Tobacco revenue nbisco projected to grow at 8. In the spring ofthe bonds were selling at steep discounts to par Exhibit 3.

Tobacco-related Litigation During the s, investors were concerned that the tobacco companies would be hit with large product liability damage awards. Registered, but not listed on an exchange. 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.

The case, still undecided as of March,rested on certain “negative pledge” covenants in the bond indentures that required that the bonds to be secured “equally and ratably” with other lenders, including the banks.

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.


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.

rjr nabisco case study solution ppt

However, in December,Moody’s failed to give the issue an investment-grade rating. These projections are in the mid-range of those of Wall Street analysts who were closely following the RJR situation.

rjr nabisco case study solution ppt

All three had left Bear Stearns where they had been doing “bootstrap” as in “pull yourself up by your bootstraps” financings, the name given to leveraged buyouts back then. With respect to the latter, covenants effectively prevented any course of action other than the raising of external funds to retire the loan.

ppr 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, the bonds would become due and payable almost immediately.

The RJR Nabisco Case Study Solution

And this KKR accomplished with a professional staff of fewer than two dozen. Reportedly, KKR did not think the plaintiffs would prevail. For example, without the banks’ permission, funds raised through an equity issue by Holdings could not be used to buy back junior debt.

rjr nabisco case study solution ppt

Dwarfing its predecessors, the fund attracted particular media attention: