RJR Nabisco's Junk Bond Prices Surge On Company's Debt Reduction Plan
RJR Nabisco Holdings Corp.'s junk bonds jumped sharply yesterday after the company announced two planned deals it hopes will greatly reduce its debt-to-equity ratio and help it obtain cheaper bank financing.
At midafternoon, RJR Nabisco's 17 3/8 bonds were up 5 3/8, while its 10 1/2s were up 3 1/2, traders said.
"The whole strategy behind this issue is to declassify the company as a highly leveraged transaction," said Terry Dwyer, a group vice president with Duff & Phelps/MCM Investment Research Co. "In doing so, the company will qualify for bank debt at far lower rates than they are currently paying."
Mr. Dwyer estimates that access to cheaper bank debt, coupled with less debt outstanding, will reduce the company's interest costs by $250 million to $270 million by 1992.
"On the face of it, it appears like it's an exceptionally good move," Mr. Dwyer said.
RJR Nabisco announced yesterday it had filed a registration statement with the Securities and Exchange Commission for an exchange offer of common stock for its entire $1.8 billion of convertible preferred stock.
The company also filed to issue about 160 million depositary shares of preferred equity redemption cumulative stock. It plans to use the estimated $1.88 billion of net proceeds from the PERCS to retire outstanding debt, the company said in a release.
RJR Nabisco's total debt will drop below $15 billion, and its total equity will increase to approximately $8 billion if the deals succeed, according to the release. That translates to a debt-to-equity ratio of 1.9-to-1.
Following its February 1989 leveraged buyout, RJR Nabisco had more than $29 billion of debt and a debt-to-equity ratio exceeding 20-to-1.
The exchange offer and PERCS issue should help lift the company's bank debt from U.S. regulators' listings of highly leveraged transactions, the company said. A Federal Reserve spokesman said it is difficult to explain how a company lands on the highly leveraged transaction list.
Once off the list, RJR could access more attractive bank financing among other benefits, Louis V. Gerstner Jr., RJR Nabisco's chairman and chief executive officer, said in the release.
"These two transactions, which complete our efforts to sell equity to retire debt, will allow us to accelerate our timetable for deleveraging and gain access to a variety of benefits in the financial markets," Mr. Gerstner said.
"We believe the steps we are now taking, combined with the strong operating performances of our food and tobacco businesses, will leave us well positioned to enhance the value of the company for the benefit of our shareholders," he added.
When RJR Nabisco completes the transactions, it plans to negotiate with its bank lending group for more favorable terms, Mr. Gerstner said. The company currently has some $5.2 billion of bank debt outstanding. RJR Nabisco will also be better positioned to retire additional high-cost, payment-in-kind debt due 1993 and 1994, the release said.
Interest savings aside, the company anticipates a number of additional benefits from the exchange offer and PERCS issue.
A more conservative balance sheet will give the company significantly more operational and financial flexibility, which will enable it to pursue more growth opportunities, especially in the international tobacco market. The flexibility will also add to its future debt reduction options.
RJR Nabisco filed to offer 3.8 shares of its common stock for each share of its 11.5% cumulative convertible preferred stock. Public investors currently hold about 72 million preferred shares and may convert them into approximately 200 million RJR Nabisco common shares. That works out to 2.7778 common shares for each preferred share.
Assuming full participation, the company would issue about 274 million shares for the entire preferred issue.
RJR Nabisco will also seek shareholders' approval to alter the terms on any remaining preferred stock from 25 years mandatory redemption to perpetual once the exchange offer is complete. That will allow it to be classified as equity for Highly Leveraged Transaction purposes.
As for the $1.88 billion of PERCS, RJR Nabisco expects to use all the proceeds to retire outstanding debt of its holdings.
Each PERCS share will pay a cash dividend quarterly and be subject to either optional redemption or mandatory conversion into common stock.
If the common stock trades at a price exceeding a pre-determined cap price, the company may redeem the PERCS into fewer shares of common stock than the PERCS would automatically convert to in three years.
Goldman, Sachs & Co. will manage the exchange offer, assisted by Morgan Stanley & Co. and Merrill Lynch Capital Markets. Morgan Stanley will manage the PERCS offering along with Goldman, Sachs.
Reacting to the news, both Moody's Investors Service and Standard & Poor's Corp. yesterday placed the debt ratings of RJR Nabisco and its subsidiaries under review for a possible upgrade. Moody's currently rates RJR Nabisco's senior debt Ba 1. Standard & Poor's rates the senior debt BB-plus and the subordinated debt BB-minus. It may also upgrade the BB-minus preferred stock.
Led by RJR Nabisco, the high-yield market was up about 1/4 to 3/4 points in spots. High-grade corporates were off about 1/4 point in the 10-year area.
Among yesterday's high-grade issuers was Federal National Mortgage Association, which issued $100 million of 6.298% floating rate notes due 1995. The notes float monthly at 70 basis points under the cost of funds index and pay quarterly. Merrill Lynch & Co. lead managed the transaction.
AMR Corp. yesterday issued $100 million of 9.8% debentures due 2021. The noncallable debentures were priced at par to yield 197 basis points over comparable Treasuries. Moody's rates them Baa 1, while Standard & Poor's assigns a BBB-plus. Goldman sole managed the offering.
Federal Farm Credit Banks issued $71 million of 7.875% notes due 2001. Noncallable for three years, the notes were priced at 99.931 to yield 7.885% or 43 basis points over comparable Treasuries. First Boston Corp. sole managed the offering.
MDU Resources Group Inc. yesterday issued $20 million of 9.125% first mortgage bonds due 2016. Non-refundable for five years, they were priced at par. Goldman won competitive bidding to manage the offering. Moody's rates the deal Baa 1, while Standard & Poor's assigns an A-minus.
As for yesterday's ratings actions, Duff & Phelps assigned an A-plus rating to Southern California Gas Co.'s $150 million issue of 8 3/4% first mortgage bonds due 2021. The bonds are noncallable for 10 years. The rating reflects Southern California Gas's "well-managed gas distribution operations and balanced capital structure," Duff & Phelps said.