R.J.

Reynolds International Financing

Introduction:

R.J Reynolds consists of tobacco products, food and beverage businesses

throughout the world. Tobacco products are sold in more than 160 markets around
the world. RJR is an international consumer Products Company based in WinstonSalem. The strategy of RJR was to focus high margin consumer related businesses
with the leading position in their respective industries. To implement this strategy,
it started acquisition of different companies. They acquired Nabisco in mid of 1985
that fit within the overall strategic plan of the company. The RJR finance $4.9
billion for the acquisition of Nabisco brand. RJR was proposing the issue of $1.2
billion of 12 year notes and the same amount in preferred stock. RJR had already
$1.5 billion funded for acquisition leaving $1 billion more to finance.

Problem Statement:

The $ 1.5 billion that RJR had funded include $500 million amount that came from
cash and the remaining fund was financed through the bank borrowings and
commercial paper. RJR had issued in 1884 because these borrowings added to the
debt part of the company that brought the debt rating down to A. The remaining
amount of financing and $1.2 billion of 12 year notes that needed to be fund is the
problem that the company was facing.

Case Analysis:

The report contains the difficulties that are faced by the company.

Eurodollar bonds:
Eurobond is the straightest method which had the all-in-cost (IRR) of 10.59%. This
calculated IRR consists of the cash flows that includes price of 100.125% , the
investment banking fee of 1.875% and the annual coupon of 10.125%. This cost of
10.59% against the U.S treasure was not a bad deal.

Euroyen bonds:
Euroyen bond made only sense when it was combined with some of the heading
tool as RJR would not have significant exposure. Euroyen bond combination with
hedging toll can be done in two ways:

a)

Forward contracts:

These contacts arrange through a dealer such as Nikko securities. Forward contacts
are used to hedge the exposure of yen for RJR and to overcome the issues of
Euroyen that occurred in the cash flows of yen and dollar. RJR initial cash inflows
are converted using offer rate and interest and principal outflows are calculated
using the bid rate (exhibit 8),

The all-in-cost (IRR) of forward contact in dollar is 10.64% and 6.769% in yen.

Swap contracts:
Swap contacts are arranged by MGL, where MGL offers yen dollar currency swap.
To RJR, MGL pays 7.1% in yen in return for $ LIBOR, another swap done by
MGL with RFR where they pay $LIBOR to RJR in return for the fixed dollar cash
flow at 10.92% from MGL. MGL pays fixed 7.1% yen to RJR and receives fixed
dollars at 10.92% from RJR.

Dual currency bonds:

Dual bond would pay interest in one currency and would be redeemable in another
currency. Ford motor credit in 1885 for yen/dollar dual currency bond that paid
higher coupon rates than the ten years Japanese government bonds and currency
risk at redemption. These dual currencies were targeted at institutions of Japan that
were willing to take the currency rate at redemption and that would be
compensated by higher coupon rates; the rate on the dual currency bond was
7.75% that is to be paid in yen but the redemption was set
.

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Reynolds has significant portion of the funding for its acquisition of Nabisco in
offshore bond markets. Morgan Guaranty suggested the yen / dollar dual currency
Eurobonds, which can be covered in dollars. This structure is compared with the
Eurodollar bonds, Euroyen bonds, bonds and Euroyen places or hedged into
dollars. Hide
on W. Carl Kester, William Allen Source: Harvard Business School 14 pages.
Publication Date: January 6, 1987. Prod. #: 287057-PDF-ENG