SAP IDs: –

Kartik Shandilya - 80303170103

Rishabh Anand – 80303180014
Disha Choudhary – 80303180036
RJR Reynolds International Financing Case Solution
Vaenu Garg - 80303180052
Background:

R.J Reynolds caters to - tobacco products, food and beverage businesses throughout the world wherein tobacco
products are found to be sold in more than 160 markets around the world. RJR is an international consumer
Products Company based in Winston-Salem and its strategy has always been to focus on high margin consumer
related businesses with the leading position in their respective industries.

RJR acquired Nabisco in mid-1985 that could fit within the strategic plan of the company. The RJR finance
amount for the acquisition of Nabisco being $4.9 billion. RJR had further proposed the issue of $1.2 billion of
12 year notes and the same amount in preferred stock wherein the current situation held that it had already
got $1.5 billion funded for acquisition that had left $1 billion more to finance.

Problem Statement:

The $1.5 billion that RJR had funded included $500 million amount that came from cash and the remaining fund
was financed through bank borrowings and commercial paper. As per the issue that arose in 1884 owing to the
fact that the borrowings made actually added to the debt part of the company ultimately bringing down the
debt rating to "A".

Thus, the remaining amount of financing along with $1.2 billion of 12 year notes is required to be funded and
can be reckoned as the problem which the company faced.

Case Analysis:

As per the case, the following difficulties were faced by the company-

1) 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.

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

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.
 3) Dual currency bonds: Dual bond would pay interest in one currency and would be redeemable in
another currency. 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.

a) If RJR hedged the yen interest payments using forward contracts through Nikko then the all-
in cost(IRR) of this option in dollars is 10.21%.

b) RJR could also hedge the yen payments using the swap rates. RJR would receive 7.1% in yen
fixed from MGL and pay 10.92& in dollars fixed. The all-in cost (IRR) of this option to RJR in
dollars is 10.27%.

Alternatives All-in cost in dollars

Eurodollar bond 10.59%
Euroyen bond hedged into dollars using forward contracts 10.64%
Euroyen bond hedged into dollars using swap contracts 10.92%
Dual currency bond hedged into dollars using forward contracts 10.21%
Dual currency bond hedging interest payments only 10.27%

CONCLUSION: -

After doing a thorough analysis, the most feasible method of financing seems to be a dual currency bond
issuance hedged into US Dollars using Yen forward contract. It is because the cost involved is less. Moreover,
this method is minimizing the foreign exchange rate risk of currency the most.