Bonds of RJR Nabisco Inc. jumped yesterday on news that Kohlberg Kravis Roberts & Co. will acquire Borden Inc. for RJR stock worth $2 billion.

Kohlberg Kravis will exchange stock of RJR that it holds for Borden's 141 million shares of common stock. RJR will then issue $500 million of new stock to buy 20% of Borden from Kohlberg Kravis. RJR will also get warrants entitling it to buy another 10% of Borden.

The transaction leaves Kohlberg Kravis with a significantly diminished stake in RJR. And RJR, which owns the Nabisco Group and R.J. Reynolds Tobacco Co., will further diversify away from cigarettes and gets to name 20% of Borden's board of directors.

RJR's bonds, rated Baa3 by Moody's Investors Service and BBB-minus by Standard & Poor's Corp., rose about two points yesterday following the announcement. With yields in the Treasury market up slightly, spreads on the RJR debt narrowed by as much as 25 basis points at the long end.

Borden's bonds, rated BBB by Standard & Poor's and Baa3 by Moody's, recovered slightly after widening substantially last month.

Standard & Poor's put Borden on CreditWatch with negative implications in mid-August due to increased uncertainty about the company's ability to restructure and improve results. On Aug. 30, Moody's said that it would review Borden for a possible downgrade.

Late yesterday, the rating agencies were still evaluating the planned merger and no rating changes were announced.

Yesterday, one trader said Borden's 7 7/8% bonds of 2023 were trading at a spread of about 250 basis points to comparable Treasuries, down from 260 points at the end of last week.

One analyst at a Wall Street firm said Borden should benefit from the RJR management team, including Kohlberg Kravis. "They need to get their act together and [RJR] has a proven team that could do that," the analyst said.

Analysts also applauded the structure of the transaction. RJR will issue $500 million of new equity, not debt.

"I'm relieved that they won't be going backwards and re-leveraging," one bond analyst said.

The transaction also relieved some investors who feared that Kohlberg Kravis would split up RJR or unload its RJR stake in other ways. "I guess this means the plan to spin off the tobacco business is on the back burner," one analyst said.

Elsewhere in the corporate sector, spreads on investment grade bonds were unchanged. In the below-investment grade market, prices were mixed.

In the Treasury market, prices dipped slightly as the market awaited today's release of the consumer price index for August. Economists forecast that CPI rose 0.4%, with the core rate, which excludes food and energy, up 0.3%.

The benchmark 30-year bond finished down 3/32 to yield 7.70%.

Following Friday's explosive report that the producer price index rose 0.6% in August, anything more than a 0.4% increase in the overall CPI could send the market into a tailspin, analysts said.

Most market players had expected the Federal Reserve to wait until at least November before raising rates again. But with reports that inflation may be heating up, investors now fear that the Fed could move at its next Federal Open Market Committee meeting on Sept. 27.

The 10-year Treasury note finished down 6/32 to yield 7.44%, the seven-year note was down 3/32 to yield 7.25%, and the five-year note was off 1/8 to yield 7.06%.

At the short end, the yield on the three-month bill rose two basis points to 4.68%, the yield on the six-month bill was up three basis points to 5.15%, and the yield on the one-year bill was up one basis point to 5.65%.

The December Treasury bond futures contract ended unchanged at 99 25/32.

RELATED ARTICLE: Treasury Market Yields Previous Previous Monday Week Month3-Month Bill 4.68 n.a. 4.456-Month Bill 5.15 n.a. 5.081-Year Bill 5.65 n.a. 5.562-Year Note 6.35 n.a. 6.223-Year Note 6.64 n.a. 6.585-Year Note 7.06 n.a. 6.957-Year Note 7.25 n.a. 7.1110-Year Note 7.44 n.a. 7.2830-Year Bond 7.71 n.a. 7.49

Source: Cantor, Fitzgerald / Telerate

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