News that Standard & Poor's Corp. is eyeing RJR Nabisco Holdings Corp. and its units for possible downgrade bruised those issues yesterday, traders said.
RJR Nabisco Inc.'s 8 3/4% notes of 2005 widened by about 30 basis points following the news. The notes were offered at 400 basis points over comparable Treasuries compared to 370 basits points on Wednesday evening.
Standard & Poor's late Wednesday said it was reviewing the BBB-minus senior debt rating of RJR Nabisco Holdings Corp. and its units, the BB-plus subordinated debt, and the BB-plus preferred stock for possible downgrades.
The rating agency also put RJR Nabisco Inc.'s A3 commercial paper rating under review for a possible cut. The company has about $14 billion of total debt outstanding.
"The CreditWatch listing reflects heightened business risk in the intensely competitive U.S. tobacco markets as it impacts earnings and cash flow and the company's ability to maintain an investment-grade profile," Standard & Poor's said in a release.
"Despite successful efforts by RJR to strengthen its balance sheet since its 1988 [leveraged buyout], aggressive U.S. tobacco cigarette pricing, the growth and competition in lower-margined value brands and the likelihood of an increase in federal excise taxes over the intermediate term have combined to increase risk and negatively impact creditor protection," the rating agency said.
Standard & Poor's said that RJR's food and international tobacco businesses continue to grow and the company could see material cost savings. But uncertainty remains as to whether growing cash flows from those areas can offset substantial declines in cash flows from U.S. tobacco operations, according to the agency.
"Going forward, S&P will monitor competition within the U.S. tobacco market and its impact on the company, the size and timing of implementation of any federal excise tax increases, the magnitude of RJR's potential cost savings, as well as prospects for its non-tobacco businesses." the release says. "Due to the complex nature of the issues that could effect credit quality, the CreditWatch listing could take several months to resolve."
Stewart Morel, a vice president and industrial analyst at UBS Securities Inc., said it's significant that the Standard & Poor's review could take several months. By then, "you are going to have a better idea of the possibility for excise tax increases."
"It seems that tobacco profits are going to continue to be hurt by pricing actions led by Philip Morris," Morel said.
Also Wednesday. Standard & poor's affirmed Philip Morris Companies Inc.'s A senior debt and A-1 commercial paper ratings; American Brand Inc.'s A senior debt and preferred stock as well as its A-1 commercial paper; and Loews Corp.'s AA-minus senior debt and A-plus subordinated debt ratings.
"The ratings outlook for Philip Morris, American Brands, and Loews remains negative due to increasingly competitive U.S. tobacco markets, product mix shifts due to lower-margined price value cigarettes and the threat of higher federal excise taxes to help fund domestic health-care reform.
Elsewhere yesterday, Viacom International Inc. filed suit against Tele-Communications Inc., Liberty Media Corporation, QVC Network Inc.. and other related parties alleging a conspiracy to monopolize the nation's cable industry.
Viacom called QVC's proposed acquisition of Paramount Communications, Inc. "one more step in [TCI President] John Malone's conspiracy to monopolize" the cable industry, according to a Viacom release.
The release said Viacom planned its suit "long before" QVC's bid for Paramount. Viacom and Paramount last week announced plans to merge.
In secondary activity, high-grade issues remained largely unchanged in thin trading though some widening was seen in certain issues. High-yield issues were unchanged.
Junk Deals Ahead
While the high-yield calendar continues to build, it seems that prospective buyers and sellers are engaged in tug-of-war over pricing.
"I think the market is trying to seek a level," Fred Cavanaugh, a vice president and portfolio manager with John Hancock's Strategic Income Fund, said. While investors have cash, they aren't rushing out to spend it, he said.
"People are waiting for good credits and good value, and then they'll step up," Cavanaugh said.
"There is a plethora of new deals," another high-yield portfolio manager said. "I believe the shelf has 60 deals on it between now and the end of the year, and I'd say between 10 and 15 deals are actively in the market."
Several high-yield deals are expected by next week, syndicate desk officials and other sources said yesterday. Best Buy was expected to offer $125 million of senior subordinated notes due 2003 through lead manager Goldman, Sachs & Co., as early as late yesterday.
Spectravision Inc. is seen offering $150 million of notes due 2001 through lead manager Donaldson, Lufkin & Jenrette Securities Corp. on Monday. Price talk on the offering is 10 3/4% to 11%.
Noble Drilling Co. is expected to sell $125 million of senior notes due 2003 through lead manager Salomon Brothers Inc. sometime next week. Price talk is 9 1/4% to 9 1/2%.
OSI Specialties is expected to offer $100 million of senior subordinated notes due 2003 through lead-manager Donaldson, Lufkin & Jenrette toward the end of next week.
A source said that although none of the upcoming deals he's reviewed appear to be standouts, PMI Aquisition Corp.'s $200 million deal priced through Kidder, Peabody & Co. on Monday stands out among recent offerings.
"The PMI deal stuck out as real quality," he said.
The source added that evaluating specific deals is difficult because he's been "bombarded" by so many. Determining how deals will be priced has become trickier lately because price talk that starts out aggressively often gets backed up later.
Through Wednesday, Securities Data Co. shows four junk issues priced totaling $600 million principal amount. The investment grade market saw 34 offerings totaling $6.7 billion during the same period.
