Rj Reynolds

1. Examine the types of securities being recommended to RJR as financing alternatives in August 1985. Are they well suited to RJR’s current liability structure and overall financing program? Why or why not? What other alternatives might be appropriate at this time?

Several types of securities are currently being recommended to R.J. Reynolds as financing alternatives. These recommendations include:

❑ Five-year yen/dollar dual currency Eurobonds

▪ Must be hedged using either:

➢ FX Forwards

➢ Interest only swapped

▪ POTENTIAL PROBLEM: Low liquidity. The market is drying up.

❑ Five-year Eurodollar bonds

❑ Five-year Euroyen bonds

▪ Must be hedged using either:

➢ FX Forwards

➢ Currency Swaps: The recent debt downgrade to an ‘A’ presents an argument in favor of currency swaps, as they will not increase the amount of debt on the balance sheet – ‘off-balance sheet obligation’.

R.J. Reynolds expects to issue $1.2 billion of twelve-year notes and $1.2 billion of preferred stock in the U.S. equity markets.

Many factors must be addressed when considering the overall financing program:

❑ Source of financing:

▪ Debt

or

▪ Equity

Considering R.J. Reynolds:

▪ has ~$1.6 billion of free cash flows as of 1984

▪ has $4.5 billion in common stockholders equity

and

▪ is currently in the process aggressively repurchasing its shares,

we recommend debt financing.

❑ Maturity:

▪ Short-term: 1-3 years

▪ Intermediate-term: 3-5 years

▪ Long-term: 5-10 years+

RJ. Reynolds’ current debt structure consists of:

▪ $101 M in short-term debt and commercial paper

▪ $1.2 billion in long-term debt

The company currently has significant exposure to short and long term debt, however, it has no exposure to intermediate-term debt. Therefore, we recommend that the firm diversify further by financing with intermediate-term...