RJR Plans Stock Swap to Lighten Huge Debt Loan
Food and tobacco giant RJR Nabisco Holdings Corp. said Thursday that it plans a stock swap to cut its debt by about $1.8 billion to below the key $15 billion threshold, sharply reducing its overall borrowing costs.
The company also said it is issuing $1.88 billion of a new preferred stock, proceeds of which will be used to retire more of its high-interest debt.
The two moves mean RJR Nabisco will no longer be a “highly leveraged” company under federal regulations. Freed of a high-risk rating, the company would be able to get cheaper financing that will cut its overall borrowing costs.
Major rating agencies, Moody’s Investors Service Inc. and Standard & Poor’s Corp., said they may raise RJR’s debt ratings as a result of the moves.
Analysts said an upgrade would bring the ratings to the investment-grade level.
“RJR’s debt swap is the final step to remove it from highly leveraged status with its banks and move it into the investment-grade category with the ratings agencies,” said Ed Mally, a high-yield analyst at Salomon Bros.
RJR’s shares fell 62.5 cents to $11 on the New York Stock Exchange, while the company’s junk bonds soared in value. The 15% bonds due in 2001 rose $25 to $1,215.00. The 13.5% bonds due in 2001 gained $18.75 to $1,133.75.
The company was bought in 1989 in the biggest leveraged buyout ever, by investment firm Kohlberg Kravis Roberts & Co. at the peak of the 1980s wave of mergers. In a leveraged buyout, investors borrow against the assets of the company that they are acquiring.
The $25-billion buyout left the company with debts of $29 billion, and RJR has since been steadily cutting debt to reduce its costly interest payments.
A spokesman said the company had total debt of $16.6 billion at the end of the second quarter, including $5.2 billion in bank debt.
“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,” RJR Chief Executive Louis Gerstner said in a statement.
In the first move, RJR said it would offer common stock for all of its $1.8 billion worth of convertible preferred shares, which pay an 11.5% dividend. The exchange effectively replaces the high interest preferred stock with common stock equity that does not yet pay any dividends.
The company said it forecast savings of $250 million to $270 million of annual interest cost savings from the stock swap.
It also plans to issue about 160 million shares of preferred equity redemption cumulative stock, or PERCS.
