Out of favored There was a lot of junk bonds being sold in the 1980's. Buffett observed that "mountains of junk bonds were being sold by those who didn't care to those who didn't think". Problems started cropping up in the later 1980's with firms that were financed using junk bonds. Companies started defaulting on their bonds and by 1989, junk bonds were largely out of favor in the market.
The junk bond that stood outAs the junk bond market unravelled, Buffett noticed that RJR Nabisco's bonds were declining with others in the market. Unlike many other companies that had issued high yield bonds at the time, RJR Nabisco was meeting its financial obligations. Buffett thought that RJR's bonds were being overly punished in the markets. RJR was selling parts of its business and was successfully lowering its debt-to-capital ratio, thereby reducing its financial risk.
Warren Buffet was also very familiar with the cigarette business. In 1987, Buffett famously stated, "I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."
Thrilling result
In 1989 and 1990 Warren Buffett bought $440 million in RJR Nabisco bonds at a discount that produced a current yield of 16%. In early 1991, RJR Nabisco announced it was retiring its high-yield bonds and Berkshire turned a profit of $150 million on the investment. Total net return is estimated at 31%
The junk bond that stood outAs the junk bond market unravelled, Buffett noticed that RJR Nabisco's bonds were declining with others in the market. Unlike many other companies that had issued high yield bonds at the time, RJR Nabisco was meeting its financial obligations. Buffett thought that RJR's bonds were being overly punished in the markets. RJR was selling parts of its business and was successfully lowering its debt-to-capital ratio, thereby reducing its financial risk.
Warren Buffet was also very familiar with the cigarette business. In 1987, Buffett famously stated, "I'll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty."
Thrilling result
In 1989 and 1990 Warren Buffett bought $440 million in RJR Nabisco bonds at a discount that produced a current yield of 16%. In early 1991, RJR Nabisco announced it was retiring its high-yield bonds and Berkshire turned a profit of $150 million on the investment. Total net return is estimated at 31%
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