RJR Nabisco Seeking To Ease Loan Terms

RJR Nabisco Inc. has approached its banks about easing the terms on some $6 billion in loans, according to sources with knowledge of the talks.

RJR is arguing that relaxed terms are justified because it has dramatically shored up its balance sheet since undergoing a $25 billion leveraged buyout two years ago, the sources said.

The giant tobacco and food company has reduced its outstanding debt by $7 billion and raised $2.7 billion in equity since last summer.

The New York-based company wants its lenders to relax conditions, including the requirement that it use excess cash flow to prepay bank debt. RJR reportedly wants to be free to use those funds for product investment or to retire more costly junk bonds.

The company also wants to reduce the interest rate on a $2.25 billion term loan by one percentage point, to 2.5 points over the London interbank offered rate. That would cut annual interest payments by about $20 million a year.

Jason Wright, an RJR spokesman, said the company continually talks to its banks and is always looking for ways to reduce "both the amount of debt and the average cost." He declined to comment further.

RJR's banking group is led by units of Citicorp, Manufacturers Hanover Corp., Chemical Banking Corp., and Bankers Trust New York Corp. Officials from the banking group declined comment or didn't return telephone calls.

Stronger Balance Sheet

RJR is the latest example of a highly leveraged borrower seeking better terms from bankers because of reduced debt and an improving financial condition. Kroger Co. and Duracell Holdings Corp. negotiated better terms on their loans after taking steps to strengthen their balance sheets.

RJR can make a strong argument for debt reduction, experts said. The company's outstanding debt has been reduced to $18.1 billion from $29 billion since its buyout. Its cash flow this year is expected to be almost twice its interest costs.

Standard & Poor's Upgrade

And Standard & Poor's Corp. recently upgraded RJR to double-B minus, one notch away from an investment-grade rating.

One of the main financial covenants RJR wants eased is the requirement that it use surplus cash flow to prepay its bank loans.

"Banks will likely be lenient in restrictive covenants because RJR's credit rating continues to improve and they won't mind keeping higher balances" of RJR debt, said David Adelman, an analyst at Dean Witter Reynolds.

Big Interest Payments at Stake

RJR's bankers apparently were expecting the request for an interest rate reduction on the term loan. The 3.5% interest rate over Libor was priced during a skittish lending environment last summer. Most leveraged deals carry rates at 2.5% over Libor, and many involve companies that are not in as good financial shape as RJR.

The high value bankers place on RJR are reflected in the price the company's loans trade in the secondary market. While most HLT loans trade at a slight discount, RJR's term loans trade at par or higher.

In April RJR sold $1 billion in equity and $1.5 billion in senior secured high-yield bonds. Proceeds will be used to retire junk bonds carrying a 17% interest rate, as well as approximately $500 million in bank debt.

An amendment to RJR's bank agreement would be the 14th since the company went private. [Graph Omitted]

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