RJR case
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 unreceptive public market,
KKR withdrew the debt offering and began discussions with RJR's lending banks.
For the banks, a major concern was the uncertainty surrounding the upcoming interest rate reset on $7 billion of RJR's pay-in-kind (PIK) bonds. Indentures required that on or before April 28,
1991, RJR reset the rate so that the bonds would trade at par (see Exhibit 1). In the spring of 1990, the bonds were selling at steep discounts to par (Exhibit 3). The market obviously saw substantial risk that the reset would fail, which would put RJR in violation of its bond covenants.
The reset bonds came into being as the "cram-down" securities in the RJR buyout. The distinctive feature of these bonds was the reset provision, which at the time of the buyout was a key factor in KKR's victory over a management group led by then-RJR Nabisco CEO, F. Ross Johnson.1
Weeks of escalating bidding, which had begun with a $75 per share all-cash bid by the management group, ended with the RJR board of directors having to choose between two final bids: KKR's offer of
$81 per share in cash plus PIK reset bonds it valued at $28 per share versus the management group's offer of $84 per share in cash plus PIK bonds it valued at $28 per
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 unreceptive public market,
KKR withdrew the debt offering and began discussions with RJR's lending banks.
For the banks, a major concern was the uncertainty surrounding the upcoming interest rate reset on $7 billion of RJR's pay-in-kind (PIK) bonds. Indentures required that on or before April 28,
1991, RJR reset the rate so that the bonds would trade at par (see Exhibit 1). In the spring of 1990, the bonds were selling at steep discounts to par (Exhibit 3). The market obviously saw substantial risk that the reset would fail, which would put RJR in violation of its bond covenants.
The reset bonds came into being as the "cram-down" securities in the RJR buyout. The distinctive feature of these bonds was the reset provision, which at the time of the buyout was a key factor in KKR's victory over a management group led by then-RJR Nabisco CEO, F. Ross Johnson.1
Weeks of escalating bidding, which had begun with a $75 per share all-cash bid by the management group, ended with the RJR board of directors having to choose between two final bids: KKR's offer of
$81 per share in cash plus PIK reset bonds it valued at $28 per share versus the management group's offer of $84 per share in cash plus PIK bonds it valued at $28 per