The Marriott Corp. spinoff that bloodied bondholders and benefited stockholders may get a new covenant named for it if a group of lawyers have their way.
The lawyers, who represent PPM America Inc.-led bondholders in a suit against Marriott, said they plan to ask the American Bar Association to adopt their proposed "Marriott Risk Covenant" at the association's meeting on Monday.
"What we are really trying to do is to get this covenant into bond indentures, and we think the ABA is a great vehicle for accomplishing that," J. Andrew Rahl Jr., a partner at the law firm of Anderson Kill Olick & Oshinsky, said. Rahl is one of three authors of the article to be presented to the ABA.
The ABA, through an affiliated organization, adopted model indenture provisions about 20 years ago, he said. Rahl thinks those provisions need to be updated because they failed to protect Marriott bondholders, who saw the value of their securities decline significantly following the spinoff announcement.
A letter from Anderson Kill announcing the proposal said, "The purpose of the Marriott Risk Covenant would be quite specific - to restrict the ways in which management can use the proceeds on non-ordinary corporated transactions, such as spinoffs and leveraged buyouts, to compensate stockholders."
The letter accompanied a draft called ~"Marriott Risk: A New Model Covenant To Restrict Transfers of Value from Bondholders to Stockholders. "
Rahl's co-authors are Lori Seegers, also an Anderson Kill partner, and F. John Stark III, senior vice president and general counsel at PPM America in Chicago.
Marriott's plan to sever its profitable hotel management business from its highly leveraged real estate and concession businesses sparked anger from bondholders when it was announced last October.
"Not surprisingly, Marriott's spinoff scheme has lit a rocket under the price of the company's stock in the past year, while having an acutely depressive effect on the value of Marriott bonds," the Anderson Kill letter says.
The $400 million of investment-grade notes Marriott issued in the spring of 1992 traded at 110 in the weeks preceding announcement of the spinoff. Those bonds "became virtual junk bonds" immediately after the announcement, sinking as low as 80, the letter says.
While the bonds have rebounded somewhat thanks to lower interest rates, they continue to fall well below expected levels because the market is nervous over the spinoff, the letter says.
"The Marriott Risk Covenant would not prohibit spinoffs or other financial sleight of hand," the letter says. "Management would remain free to pursue any '90s style transactions its investment bankers could devise, though not for the purpose of creating windfall payments to stockholders taken from bondholders' pot."
The letter says that since Marriott's announcement last October, three other well known U.S. companies - Skybox International, Mirage Resorts, and Litton Industries - have sought to take assets from bondholders through spinoffs that distinctly favor stockholders.
"The Marriott Corporation spinoff represents a new extension of a trend of increasingly drastic, some would say outrageous, transactions which have transferred value from bondholders to stockholders," a draft of the proposal says. "The trend, which began with the leveraged buyout boom in the 1980s and reached a peak with the RJR-Nabisco leveraged buyout, has now been revived and expanded under the guise of the corporate spinoff, or the Marriott risk."
In its conclusion, the draft says the Marriott situation shows that events that transfer significant value from bondholders to stockholders will continue to threaten bondholders and undermine the fixed-income market's stability.
"The authors believe that the only real, practical solution to the Marriott risk problem is for the American Bar Association and the financial community to act together to promote market acceptance of a new form of narrowly focused event risk proceeds bond indenture covenant which restricts only the payment of proceeds of such events to stockholders."
Asked to comment on the proposal, Marriott spokesman Robert T. Souers replied, "I can't comment on what they're saying because I haven't seen it."
Souers said, however, that billions of dollars of bonds" have been priced since Marriott's announcement, and that those companies have not felt the need for such a provision.
"I think they are trying to make a generality of what was a very specific case," Souers said.
In other news yesterday, Citicorp Securities Inc. said it was the sole underwriter and remarketing agent for a 35-year, $50 million, Multi-Mode Remarketed Secured Note issue for Detroit Edison Co.
"We developed this new structure especially to meet the needs of the Detroit Edison Company, but it is applicable to any investment-grade issuer," Gail Rosen, a vice president at Citicorp Securities, said in a release.
The notes, which Detroit Edison sold yesterday, are public securities secured by the company's general and refunding mortgage. They have interest reset periods that the company may set, ranging from daily to the final maturity date.
Citicorp will reset the interest rate and remarket the notes as they are tendered by investors at the end of each interest reset period. To start, Detroit Edison issued its offering in the 30-day market at a 3.32% rate.
While such structures are used in the tax-exempt market and a limited number have been done in the taxable market, yesterday's structure probably offers the most flexibility, Rosen said.
"This innovative financing allows the company flexibility in its debt management by issuing notes with an interest rate corresponding to any floating-or long-term fixed rate period," the release says.
Christopher C. Arvani, assistant treasurer of banking at Detroit Edison, said, "This is a new idea for our company ... The new Multi-Mode Remarketed Secured Note structure will allow us to better take advantage of the yield curve, giving us tremendous financing flexibility if we decide to fix the rate, while reducing financing expenses."
In secondary trading yesterday, high-yield bonds ended 1/8 point higher as spreads on high-grade issues ended unchanged.
New Issues
Ford Motor Credit issued $300 million of 6 3/4% noncallable notes due 2008. The notes were priced at 99.415 to yield 6.813% or 100 basis points more than the when-issued 10-year Treasuries. Moody's Investors Service rates the offering A2, while Standard & Poor's Corp. rates it A. J.P. Morgan Securities Inc. lead-managed the offering.
New York Telephone sold $250 million of 7% debentures due 2025. Noncallable for 10 years, the debentures were priced at 97.679 to yield 7.186 or 73 basis points more than the when-issued 30-year Treasuries. Moody's rates the offering A2, while Standard & Poor's rates it A. Goldman, Sachs & Co. managed the offering.
Salomon Inc came to market with $200 million of 6.75% notes due 2003. The notes were priced at 99.52 to yield 6.817% or 99 basis points over comparable Treasuries. Moody's rates the offering A3, while Standard & Poor's rates it A-minus. Salomon Brothers Inc. served as lead manager.
Caremark International Inc. offered $100 million of 6.875% notes due 2003. The noncallable notes were priced at 99.464 to yield 6.95%. Moody's rates the offering BBB-minus, while Standard & Poor's rates it Baa3. Lazard Freres & Co. lead-managed the offering.
Carolina Telephone & Telegraph issued $50 million of 6 3/4% debentures due 2013. The noncallable debentures were priced at 99.165 to yield 6.827% or 37.5 basis points more than the when-issued 30-year Treasury bond. Moody's rates the offering A1, while Standard & Poor's rates it A. Merrill Lynch & Co. won competitive bidding to underwrite the offering.
Carolina Telephone & Telegraph offered 50 million of 5 3/4% debentures due 2000. The noncallable debentures were priced at 99.4 to yield 5.856 or 37.5 basis points more than comparable Treasuries. Moody's rates the offering A1, while Standard & Poor's rates it A-minus. Goldman Sachs won competitive bidding to underwrite the offering.
