A group of Marriott Corp. bondholders yesterday filed suit against the company, charging securities fraud resulting from a reorganization plan announced this month.
The suit, filed in federal district court in Maryland, alleges Marriott failed to disclose its planned restructuring when it issued $400 million of senior notes in April and May, and withheld the same information from the secondary market as late as September.
Marriott's restructuring includes a proposal to split the company in two, saddling one entity, Host Marriott, with virtually all outstanding long-term debt, but only 40% of the cash flow.
Moody's Investors Service responded to the plan by downgrading Marriott senior debt and industrial revenue bonds to Ba2 from Baa3 the day of the Oct. 5 announcement. The market took the news hard as well, with prices crashing as much as 25 points on some bonds, traders said.
Lawyers representing Marriott bondholders say the damage is continuing. In the last four weeks, the value of Marriott's Series L and Series M senior notes has fallen by $120 million, or more than 30%, according to Anderson Kill Olick & Oshinsky, the law firm representing bondholders.
"It is inconceivable to think that Marriott did not know it was contemplating a corporate restructuring of this magnitude when these debt securities were issued last spring," said Lawrence Kill, an attorney at the firm. "At some point there is a duty to disclose."
The lawsuit also says the Marriott family profited substantially from the restructuring announcement, which pushed stock prices 9% higher on a day when the Dow Jones industrial average fell nearly 22 points. The rise resulted in a $47 million profit for the family, Kill said.
A spokesman for Marriott said yesterday that company officials had not yet seen the lawsuit, and had no comment.
But last week Marriott's chief financial officer, Stephen F. Bollenbach, tried to reassure investors during a bond conference in Florida, saying cash flow at Host Marriott would be healthy.
Bollenbach said revenues would flow to the company from its extensive real estate operations, according to a new release. He said Marriott International, the second entity expected to emerge from the restructuring, would provide a $600 million revolving credit line through December 1997. Market sources said the statements failed to cheer bondholders.
In addition to monetary damages, bondholders are asking the court to block any transactions related to the restructuring, and they want an order compelling Marriott to buy back its senior notes from bondholders who wish to sell.
The plaintiffs, which hold more than $100 million in senior Marriott securities, include PPM America Inc., the investment adviser for Jackson National Life Insurance Co. PPM America owns $35 million of Marriott's 9 1/2% senior notes.
Junk Market on the Mend
In other news yesterday, Standard & Poor's Corp. said credit quality in the high-yield corporate bond market has improved significantly as a result of the mass of restructuring and refinancings.
So far this year, 24 junk issuers earned upgrades from the rating agency, with 10 joining the investment-grade elite. In the third quarter, Arkansas Best Corp., Durr-Fillauer Medical Inc., Fruit of the Loom Inc., and Sensormatic Electronics Corp. moved from speculative- to investment-grade ratings.
"There were no fallen angels" that slipped to junk during the quarter, Standard & Poor's said.
The number of upgrades for the quarter was twice as high as downgrades. Last year, downgrades matched upgrades at 20 apiece for the quarter.
For the first nine months, eight issues totaling $40 billion were upgraded, with issuers in the media and entertainment industry accounting for 27% of the total. Standard & Poor's has downgraded 71 issues totaling $29 billion during the same period.
Chase Manhattan Bank yesterday issued $200 million of 7.75% subordinated noncallable notes. The notes were priced at 99.66 to yield 7.814%, or 155 basis points over comparable Treasury securities. The deal, lead managed by Goldman, Sachs & Co., was rated Baa3 by Moody's and BBB by Standard & Poor's.
The Federal Home Loan Bank issued $100 million of 5.06% debentures due in 1995. The securities were priced at par at a spread 31 basis points over comparable Treasuries, and are noncallable for one year.
The Home Loan Bank also issued $50 million of 6.20% debentures due in 1999. They were priced at par at a spread 40 basis points over comparable Treasuries.
Lehman Brothers lead managed both issues.
National Fuel Gas Co. issued $50 million of medium-term noncallable notes with a 6.42% coupon. The notes were priced at par and are yielding about 63 basis points more than the current when-issued five-year Treasury note. They are rated A3 by Moody's and A-minus by Standard & Poor's. Kidder, Peabody & Co. was lead manager.
Traders reported high-grade issues were mostly unchanged in yesterday's secondary market action, with the note issue priced Monday by IBM still popular among investors. On the high-yield side, bonds gained about 1/2 point.