《金融工程》案例解析英文版).ppt

CasesinFinancialEngineering Instructor ChenMiaoxin TheCaseofRJRNabiscoHoldingCapitalCorporation Reference RobertM Dammon KennethB Dunn AndChesterS Pratt 1993 TheRelativePricingofHigh YieldDebt TheCaseofRJRNabiscoHoldingsCapitalCorporation theAmericanEconomicReview 83 Dec PartOne Background Background1 Thefirmknownin1991asRJRNabiscowasadescendantofthetobaccofirmR J Reynolds foundedin1875 Throughacquisitionsinthe1960s thetobaccofirmenteredavarietyoffoodbusinesses Afterits1985merger thefirmwasrenamedRJRNabisco Background2 Inthelate1980sthefoodproductsindustryexperiencedmassiveconsolidationthroughmergers In1988twomainbiddersproposedtotaketheRJRNabiscoprivateinaleveragedbuyoutcontest TheManagementGroupKohlberg Kravis Roberts Co KKR afirmspecializinginleveragedbuyouts Background3 Attheendofabiddingwar KKRprevailedbyofferingshareholders 81pershareincashplusapackageofbondsvaluedat 28 ThedaybeforethefirstannouncementofapossibletakeoverforRJRNabisco itsstockhadtradedat 77 25 Thus KKRofferedcommonshareholdersa41 premiumoverthefirm spre takeovervalue Tofinancethebuyout KKRincreasedRJR sdebtfrom 5billionto 29billion Background4 Thenewfirmwasstructuredasaseriesofholdingcompanies Eachoftheserelatedentitieshadseparateobligations issuedeitherinconjunctionwiththeacquisitionor inthecaseofRJRNabisco Inc theoperatingcompany carriedoverfromthetaken overfirm PartTwo DescriptionofSecurities Issuance InMay1989 RJRholdingsCapitalCorporationissuedthreenearlyidenticaldebtsecuritiesinconnectionwiththeleveragedbuyoutofRJRNabiscobyKKR 1 0billionof15 percentpayment in kindsubordinateddebenturesdue2001 pay in kindbond 4 1billionofsubordinateddiscountdebenturesdue2001 deferred couponbond 525millionof13 5 percentsubordinateddebenturesdue2001 cash payingbond Difference Themajordifferenceamongthethreesecuritiesistheforminwhichinterestispaid Thedifference1 The13 5 percentcash payingbondpaysinterestincash Thebankruptcyclaimofthecash payingbondisparplusaccruedinterest Thedifference2 AfterMay15 1994 thedeferred couponandpay in kindbondsbecomeidentical15 percentcash payingbonds PriortoMay16 1994 interestonthe15 percentpay in kindbondmay attheoptionofRJR bepaideitherincashorthroughtheissuanceofadditionalpay in kindbondsvaluedat100percentofpar Thebankruptcyclaimofthepay in kindbondisparplusaccruedinterest Thedifference3 Thedeferred couponbondwasissuedonMay15 1989 atapriceof 48 656per 100offacevalue ThroughMay15 1994 thedeferred couponbondpaysnocouponbutaccretestofacevalueonMay15 1994 atarateof15percentperyear compoundedsemiannually PriortoMay15 1994 thebankruptcyclaimofthedeferred couponbondisitsaccretedvalue Thedifference4 Thedeferred couponbondandpay in kindbondstradeflat i e withoutaccruedinterestdueuponsettlement priortoMay15 1994 whilethesettlementpriceofthesetwobondsisthequotedpriceplusaccruedinterestafterMay15 1994 Thesettlementpriceofthe13 5 percentcash payingbondisalwaysitsquotedpriceplusaccruedinterest PartThree TheoreticalPricingRestrictions Notation Assumption therearenomarketimperfections Wedenotethequotedprice per 100offacevalue attimetofthecash payingbondbythedeferred couponbondbythepay in kindbondbyWeletvtdenotethesettlementprice i e thequotedpriceplusaccruedinterest attimetofabondwhosequotedpriceispt PriortoMay15 1994 Sincethedeferred couponandpay in kindbondstradeflatpriortoMay15 1994 fort T whereT isMay15 1994 AfterMay15 1994 AfterMay15 1994 boththedeferred couponandpay in kindbondsbecomeidentical15 percentcash payingbonds Inadditiontopayingalowercoupon the13 5 percentcash payingbondalsohasalowercall priceschedule seetable2 thaneitherthedeferred couponorpay in kindbonds Asaresult thefollowingarbitragerestrictionmustholdafterMay15 1994 wheretheinequalityassumedtheabsenceofrefinancingcosts 1 Deferred couponandcash payingbonds Consideraportfolioconsistingofonedeferred couponbondandU S Treasurystripswithfacevaluesof 6 75thatmatureateachofthecouponpaymentdatesthroughMay15 1994 Cont BeyondMay15 1994 thedeferred couponbondismorevaluablethanthecash payingbondduetoitshighercouponandcall priceschedule seeequation 1 PriortoMay15 1994 theportfolioofonedeferred couponbondplustreasurystripshasthesamepromisedpaymentsasthecash payingbond butlessdefaultriskbecausethepaymentsontheTreasurystripsareriskless whereastheinterestpaymentsonthecash payingbondarerisky Cont Therefore whereqitistheTreasury strippriceattimetforadollarofpaymentatthe