International Financing Case Analysis

Group 4:
Aniketna Kriti Kumar Gaurav Kumar Rohit

R.J Reynolds

A major international consumer products operated in tobacco products, food and beverages products Ranked 23 in 1984 Fortune 500 lists The second-largest tobacco company in the United States and has approximately 30 percent of U.S. cigarette sales The company offers products in all segments of the market, and makes five of the nation's 10 best-selling cigarette brands: Camel, Kool, Winston, Doral and Salem

Nabisco

One of the largest food companies in the United States, manufactured and sold cookies, crackers, nuts and snacks, confectionary dessert, margarines, hot cereals, pet snacks and consumer yeast Also produced and marketed the products in Canada, UK, Europe continent, Latin America, Asia/Pacific Region

RJR acquisition of Nabisco

The acquisition value is $ 4.9 bn

$ 1.2 bn of 12-year notes $ 1.2 bn of preferred stock $ 0.5 bn of cash on hand $ 0.5 bn of short term floating rate debt $ 0.25 bn of 30-year debentures $ 0.25 bn of 8-year notes Leaving $1 bn more to finance???

Question 1

Examine the type of securities being recommended for RJR as financing alternatives! Are they well suited to RJRs current liability structure and overall financing programme?

MGT Recommendations

5-year yen/dollar dual currency Eurobonds 25 bn, non callable, at a price 101.5% Coupon of 7 %,fees 1 7/8% 5-year Eurodollar bonds $ 100 million, non callable, at a price 100.125% Coupon of 10 1/8 %,fees 1 7/8% 5-year Euroyen bonds 25 bn, non callable, at a price 100.25% Coupon of 6 3/8 %,fees 1 7/8%

Decision Problem
Financing

Equity

Bond

Domestic

International

Fixed rate

Floating rate

Short term maturity

Intermediate term maturity

Long term maturity

Equity VS Bond

$ 1.484 bn in long term debt $ 4.478 bn in common stockholder equity RJR involved in repurchase program several times Nov 1984 = repurchase 10 million stocks Aug 1985 = repurchase 7.9 million stocks Relatively low leverage and stocks less attractive due to the repurchase program Debt (Bond) is more favorable

Domestic VS International

The companys current debt are domestic debt The recent debt downgrade to an A Issuing domestic debt will become more expensive Issuing foreign debt offer a chance that foreign investors will less sensitive than domestic investors to the fact of downgrading; they will perceive the debt as high quality debt and satisfied with a lower coupon International bond issuance is more favorable

Fixed VS Floating Rate

$ 500 million of short term debt and commercial paper which typically floating the company already has substantial exposure to floating rate The fixed rate debt is more favorable

Maturity Criterion

Companys current debt structure $101 million in notes payables $1.257 bn in long-term debt (less current maturities)
The company currently has significant exposure to short and long term debt, but no exposure to intermediate-term debt The company is analyzed the maturity spectrum of its existing debt and targeted amounts for various maturities ranging from 4 to 30 years Therefore, intermediate term debt is favorable

Question 2

Of the instruments recommended which one would you advice RJR to choose? Why?

3 Alternatives to raise capital

1-Yen/Dollar Dual Currency Eurobonds: RJR could issue 25 billion yen non callable Yen/ Dollar. price 101.500% face value 25 billion Yen Annual coupon :7.750% Final redemption:$115.956 million . The problem of dual currency bond might present to RJR additional foreign exchange exposure.

Dual Currency Eurobonds

a hybrid debt instrument with obligations payment over its life is in two different currencies

The borrower makes coupon payments in certain currency but redeems the principal at maturity in another currency in an amount fixed at the time of the issue of the bonds FX Forwards A regular yen liability = 5-year dollar forward contract A regular dollar liability = yen forward contract to cover annual yen coupons Market liquidity is low

Hedging Instruments

Potential Problem

Noncallable Eurodollar Bond

RJR could issue 5 years noncallable Eurodollar bond

$100 million 100.125% of par 10.125% annual coupon 1.875% fees Par in redemption

Eurodollar Bonds

No hedging instrument of foreign exchange exposure is needed Relatively higher liquidity in the market Higher coupon rate

Euroyen Bonds

RJR could issue a 5 year noncallable Euroyen bond

25 billion 100.25% of par 6 3/8% annual coupon 1 7/8% fees Par in redemption

Euroyen Bonds

Facing exposure of foreign exchange risk Alternative of hedging instruments FX Forwards Currency Swap

FX yen 7.10%

MGL
6 month LIBOR

RJR

MGL
FX $10.92%

RJR

Recommendations

IRR for Dual Currency Bonds = 10.099% IRR for Eurodollar Bonds = 10.593% IRR for Euroyen Bonds = 10.086%

Recommendations

Issue 5 year noncallable Euroyen bond for 25 billion, 100.25% of par, 6 3/8% annual coupon, 1 7/8% fees We recommend to convert Euroyen liability to a dollar liability with a currency swap

Question 3
Analyze the dual currency bond Are the terms attractive for RJR? Are the terms attractive for investors?
currency bond?

Why would an investor be interested in a dual

Analysis of the Dual Currency Bond

Benefits:

Hedge vehicle for yen liabilities Beneficial for financing new or expanding operations in the country that issues the final payoff currency

Analysis of the Dual Currency Bond

Benefits to the investor:

Built-in forward contract Coupon rates are higher than typical fixed rate bonds

Analysis of the Dual Currency Bond

The terms of the deal are more favorable to RJR as they are getting a reduced all-in cost after the forwards. RJR is subject to currency risk, however, they have hedged their position to alleviate this problem. In addition, the investors are paying a premium on the bond.