Marriott Corp., an anathema to recession-scared bond buyers just months ago, yesterday proved the right yield now lures investors to even the most cyclical names.
The Washington-based hotel chain operator found a rousing welcome for $125 million of 10-year notes, sold via Merrill Lynch Capital Markets.
The deal, priced to sell with a 10 1/4% coupon at 195 basis points over the Treasury's 10-year note, quickly blew out, underwriters said.
The market's warm reception for a highly cyclical lodging credit is another vote of confidence for the U.S. economy, market players said.
Last fall, as fears of recession gripped investors, Marriott became a leper in the bond market when it froze construction starts.
The move started a sharp sell-off in the company's bonds and drew strong words from several Wall Street analysts about Marriott's vulnerability to softening real estate markets and a slowing U.S. economy. At the time, spreads on Marriott's 11 1/8% senior notes of 1995 ballooned to more than 350 basis points.
Now, "with people thinking the economy is solidly on track, there's more of a propensity for cyclicals," said Marsha Zercoe, fixed-income manager at Provident Capital Management in Philadelphia. "And spreads in general are pretty tight, so in the scheme of things that [deal] doesn't sound bad."
David Chichester, vice president of corporate finance and assistant treasurer at Marriott, said, "The markets are feeling quite good about the Marriott credit," adding, "our spreads have narrowed dramatically over the past four or five months."
Mr. Chichester said the company had been eyeing bond financing for months, and pulled the trigger because "on a historical basis, rates are very close to their low point."
With its leverage running at about 90% Marriott's debt load remains high.
But "It's fair to say that an economic recovery will help the travel industry," said Robert C. Nelson, who follows lodging for Standard & Poor's Corp., noting that travel restrictions because of Persian Gulf war hit much of the industry hard.
"Marriott's first-quarter hotel operations did quite well given what was happening with the war," Mr. Nelson said. "We believe this is due to the companies' excellent reputations and quality product."
Even so, oversupply continues to plague the lodging industry, while financing remains scarce for new construction, he said.
Standard & Poor's Corp. rates Marriott BBB; Moody's Investors Service rates it Baa2.
Elsewhere in the primary market, Pepsico Inc. hedged its bets on interest rates with short-term notes.
Working through a selling team lead by Morgan Stanley Inc., the consumer food company offered $250 million of two-year securities off its medium-term note shelf.
The noncallable securities were priced as 7.35s at par to yield 42 basis points over Treasuries -- about five basis points too rich, traders said.
"It was a little ahead, but now it's 46 over and doing better," said one syndicate source.
While the deal came off Pepsi's medium term note shelf, it was a de facto underwritten deal. Medium term notes are typically sold in small allotments on a continuous basis. Though similar to commercial paper, these securities enable corporations to extend maturities beyond commercial paper's 270-day limit.
"Pepsico does some unusual things with" medium term notes, said one capital markets specialist. "Basically when they sell [these securities], it looks and feels like a regular bond to the investor, and they also do a lot of one-year swaps and must have special clientele that just want floating-rate Pepsico paper."
Pepsico has stayed in the short end so far in 1991, selling $500 million of one-year notes with a 57 basis point spread on March 31, and $200 million of three-year securities at a 64 basis point spread on Jan. 3.
Analysts noted that Pepsi has large overseas cash balances that are probably invested in short-term paper, so the company may be trying to match those maturities.
Officials at Pepsi did not return telephone calls seeking comment.
As far as Pepsico's debt securities are concerned, analysts said the company offers investors sound, recession-proof businesses, slowdowns, that even in the economic slowdowns, consumers quaff soda and eat pizza.
"It's a very fine generator of cash flow, capital spending requirements are not that onerous, and they're a relatively recession-resistant business," said Alexander Bing 3d, vice president at Donaldson, Lufkin & Jenrette Securities Corp. "As long as they don't over do it with acquisitions, everything is fine.
"In the days surrounding [the leveraged buyout of] RJR Nabisco, there was concern that Pepsi might be the next target of Philip Morris, or that ultimately Pepsi would want a fourth leg to its business besides soft drinks, snacks, and restaurants," Mr. Bing said. "But in today's climate, where people are a little less phobic about those kinds of adventures, those worries have probably lost a little of their bite."
Also in the new-issue market, CIT Group Holdings Inc., which is 60% owned by Dai-Ichi Kangyo Bank Ltd. and 40% by Manufacturers Hanover Corp., hit the short end with $200 million two-year notes priced as 7 1/2s to yield 58 basis points over the Treasury curve.
Moody's rates CIT A1; Standard & Poor's rates it A-plus.
Sears, Roebuck & Co., meanwhile, kept the ball rolling in the asset-backed sector with the second half's second issue.
Working through Goldman, Sachs & Co., Sears Credit Account Trust 1991-C offered $500 million of credit card securities priced as 8.65s to yield 78 basis points over the five-year Treasury note -- the tightest spread ever on a five-year Sears deal.
The offering is expected to carry triple-A ratings from the major agencies.
In the secondary market, investment-grade issues advanced 3/8 point on the coattails of Treasuries, while most junk issues climbed 1/4 to 1/2 point.
