KKR Pitches ‘Junk Bonds’ to Japan to Aid RJR Financing

Takeover guru Henry Kravis has asked the Japanese for help in financing his firm’s record $24.53-billion buyout of RJR Nabisco Inc., and Wednesday made a sales pitch for “junko bondos” to be issued as part of the deal.

Kravis, principal of Kohlberg Kravis Roberts & Co., and representatives from Drexel Burnham Lambert Inc. met for about two hours with 240 investment bankers and institutional investors in Tokyo, according to spokesmen for Kravis and Drexel.

They said the two groups discussed the $5 billion in high-yield, high-risk junk bonds--in Japan, they are often called junko bondos--that will be sold to finance KKR’s $109-a-share RJR takeover.

KKR will also borrow $14 billion from a syndicate of banks, and it hopes to have significant Japanese representation there as well. Kravis met with about a dozen large Japanese banks earlier this week in Tokyo.

Steven S. Anreder, a senior vice president at Drexel, said Wednesday’s meeting in Tokyo “went very well.”

“I’m told the investors were very enthusiastic” about buying bonds, he said.

Drexel and Merrill Lynch & Co., KKR’s two main Wall Street financial brokers, will underwrite the debt securities.

Neither they nor KKR would say how many bonds they hoped to sell to the typically conservative Japanese investors, although analysts noted that Japanese interest in these bonds has increased significantly in recent years.

The foreign market share now totals about 3%, with a large portion made up of Japanese investors, compared to just a small fraction a few years ago, according to a recent General Accounting Office report and analysts.

The volume of junk bonds also has increased over the years, as more and more companies find use for them in acquisitions. They’re called “junk” only because they’re issued by companies whose credit ratings are below investment grade. That’s the case with RJR Nabisco because of the huge debt load from the buyout.

While junk bonds will play an important role in KKR’s financing, the majority of RJR Nabisco’s resulting debt will come from bank loans.

Before meeting with the Japanese banks, Kravis met with representatives from 40 big U.S. banks in New York to seek commitments of at least $500 million by Jan. 17. About 100 smaller U.S. banks will be asked for $100 million to $500 million at a meeting in early January.

Banks that commit loan money by Jan. 6 “will be paid a modest incentive,” said James P. Ferguson, a managing director for acquisition finance at Manufacturers Hanover Trust Co., one of four lead banks on the transaction.

Ferguson said the Japanese are expected to put up about one-third of the $14 billion in bank loans.