1、FinancialEngineeringCases in Financial EngineeringInstructor: Chen Miaoxin1返回目录FinancialEngineeringThe Case of RJR Nabisco Holding Capital Corporation2返回目录FinancialEngineeringReference:Robert M. Dammon, Kenneth B. Dunn. And Chester S. Pratt. 1993. The Relative Pricing of High-Yield Debt: The Case of
2、 RJR Nabisco Holdings Capital Corporation. the American Economic Review, 83 ( Dec.) 3返回目录FinancialEngineeringPart One: Background4返回目录FinancialEngineering Background 1wThe firm known in 1991 as RJR Nabisco was a descendant of the tobacco firm R.J. Reynolds, founded in 1875.wThrough acquisitions in t
3、he 1960s, the tobacco firm entered a variety of food businesses.wAfter its 1985 merger, the firm was renamed RJR Nabisco. 5返回目录FinancialEngineering Background 2wIn the late 1980s the food products industry experienced massive consolidation through mergers.wIn 1988 two main bidders proposed to take t
4、he RJR Nabisco private in a leveraged buyout contest:The Management Group Kohlberg, Kravis, Roberts &Co. (KKR), a firm specializing in leveraged buyouts6返回目录FinancialEngineering Background 3w At the end of a bidding war, KKR prevailed by offering shareholders $81 per share in cash plus a package of
5、bonds valued at $28. w The day before the first announcement of a possible takeover for RJR Nabisco, its stock had traded at $77.25.w Thus, KKR offered common shareholders a 41% premium over the firms pre-takeover value.w To finance the buyout, KKR increased RJRs debt from $5 billion to $29 billion.
6、7返回目录FinancialEngineering Background 4wThe new firm was structured as a series of holding companies.wEach of these related entities had separate obligations, issued either in conjunction with the acquisition or, in the case of RJR Nabisco, Inc, the operating company, carried over from the taken-over
7、 firm.8返回目录FinancialEngineeringPart Two: Description of Securities9返回目录FinancialEngineering Issuancew In May 1989, RJR holdings Capital Corporation issued three nearly identical debt securities in connection with the leveraged buyout of RJR Nabisco by KKR $1.0 billion of 15-percent payment-in-kind subordinated debentures due 2001 (pay-in-kind bond) $4.1 billion of subordinated discount debentures due 2001 (deferred-coupon bond) $525 million of 13.5-percent subordinated debentures due 2001 (cash-paying bond)10返回目录
