HBS Case RJR Nabisco 1990 Assignment Questions

1. How have the various participants in the RJR buyout fared to date?
2. Compare the characteristics of the fixed income instruments issued by RJR Nabisco after the
LBO (interest rate, amortization schedule, optionalities, indentures and the various exotic
features) with those of pre-buyout debt. What are the likely reasons for such stark difference in
complexity?
3. What was the left-hand side of RJRs balance sheet worth in the spring of 1990? What was the
market value of all claims on the right-hand side? Does the market value of the liabilities equal
the value of the assets? If not, can you explain the difference?
4. How will holders of the PIK Debentures fare if the interest rates on these securities are reset on
or before April 28, 1991 so that they trade at par?
5. What were the problems facing KKR in the spring of 1990? Why was KKR in negotiation with
lenders regarding the refinancing of a $1.2 billion bridge loan due to be repaid only in February
1991? Would it make sense for KKR to infuse new equity into RJR?

HBS Case RJR Nabisco 1991 Assignment Questions

A)

What package of Discount Debentures and Treasury STRIPs would produce one synthetic
13.5% Debenture? On January 15, 1991, how much would it cost Ms. Samuels to buy the
components of one synthetic 13.5% bond?

B)

How will the synthetic 13.5% and the RJR 13.5% Debentures perform differently over time?
You may want to consider factors including, but not limited to, how the investments are affected
by interest rate changes, changes in RJRs credit rating, etc.

C)

How could Ms. Samuels profit from the relative mispricing of the RJR 13.5% Debentures
and the Discount Debentures? What advice might she give to the following tax exempt clients?

Client A who already owns the 13.5% RJR Debenture;

Client B who does not own the 13.5% RJR Debenture.

So Paulo, September 4th 2016