In 1987 RJR Nabisco,the Food and Tobacco Giant,had $5 Billion

question 128

Essay

In 1987 RJR Nabisco,the food and tobacco giant,had $5 billion of A-rated debt outstanding.In that year the company was taken over,and $19 billion of debt was issued and used to buy back equity.The debt ratio skyrocketed,and the debt was downgraded to a BB rating.The holders of the previously issued debt were furious,and one filed a lawsuit claiming that RJR had violated an implicit obligation not to undertake major financing changes at the expense of existing bondholders.Why did these bondholders believe they had been harmed by the massive issue of new debt? What type of explicit restriction would you have wanted if you had been one of the original bondholders?

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Definitions:

Oculus

A circular opening at the top of a dome or in a wall, allowing light and air into the space below; notably used in Roman and Renaissance architecture.

Emperor of the West

Historically refers to the ruler of the Western Roman Empire, specifically after its division from the Eastern Empire.

Honorius

A Roman Emperor of the West (395-423 AD) known for his reign during the period of the empire's decline in the face of Visigothic invasions and internal strife.

Constantinople

The historical name for the modern city of Istanbul from its founding in 330 AD until the Ottoman conquest in 1453, serving as the capital of the Byzantine Empire.