Marriott Corp. bonds were hit hard yesterday after the company announced plans to divide in two, traders said.
"It's just because [the market] reacted negatively to the news," one trader said. "They think it weakens the credit."
One trader said the spread on Marriott's 9 1/2% bond due 2002 "widened out by 400 basis points," with prices dropping about 25 points on the bid side and 18 3/8 on the offered side.
Losses on other Marriott securities varied according to maturity, with longer-term paper being hit harder, traders said.
J.W. Marriott Jr., Marriott's chairman, said in a company release that "the division into two different companies will enable us to advance our longstanding strategy of separating ownership of properties from management of operations."
One company, Marriott International Inc., will include lodging, food and facilities management, and senior living service operations.
The other, Host Marriott Corp., will include Marriott's real estate, in addition to its airport and toll road concessions.
Host Marriott will retain most of Marriott Corp.'s long-term debt obligations, the release says.
"The transaction will permit Marriott International to focus its efforts on expansion of management businesses where individual opportunities require relatively small amounts of capital, "Marriott said. "Host Marriott will retain substantial fixed assets for longer-term opportunities in capital-intensive businesses - real estate, and airport and toll road concessions."
Marriott plans to accomplish the split through a special dividend. The special dividend gives shareholders one share in the new company Marriott International, in addition to each Marriott Corp. share they hold. Both companies' shares are expected to be listed on the New York Stock Exchange.
Marriott will then emerge as Host Marriott.
Among other things, the transaction hinges on Marriott Corp.'s board's declaration of the special dividend and the Internal Revenue Service's approval that the special dividend will be tax-free to shareholders.
Marriott expects to distribute the dividend in mid-1993, once those conditions are satisfied.
The company's announcement led Moody's Investors Service to lower Marriott's debt and preferred stock ratings on about $2.8 billion of securities.
"Most of Marriott's current debt burden will be retained at Host Marriott, which accounted for only about 40% or the enterprise's operating cash flow," according to a Moody's release. "Debt service measurements will weaken significantly with improvement dependent on asset sales to reduce debt."
The following ratings were downgraded:
Marriott Corp.'s senior debt and industrial revenue bonds to Ba2 from Baa3, subordinated debt to B1 from Ba1, preferred stock to b1 from ba1, senior shelf debt to (P)Ba2 from (P)Baa3, and preferred stock shelf registration to (P)b1 from (P)ba1.
Moody's will keep those ratings under review for a possible additional downgrade.
Standard & Poor's Corp. put about $2.7 billion of Marriott Corp.'s outstanding debt and equity on CreditWatch for a possible downgrade.
Under review are Marriott's BBB senior debt, BBB-minus subordinated debt and preferred stock, preliminary BBB rating on $125 million shelf registration, and preliminary BBB-minus on $230 million of preferred stock, also filed under a shelf registration.
"Marriott Corp.'s plan to spin off its hotel management operations to shareholders has negative implications for ratings on the firm's public debt and preferred stock," a Standard & Poor's release says. "Ratings will likely fall to mid-speculative grade following S&P's review of Marriott's plan."
Asked to address the rating agencies' concerns, Robert T. Souers, a Marriott spokesman, said, "We structured the transaction so the cash flows would be sufficient to cover the debt service. We believe it will."
As an "added margin of safety," Souers said, Host Marriott will have access under certain conditions to up to $600 million from Marriott International under a revolving credit line through December 1997.
But, he added, "We don't anticipate having to use that."
In secondary trading overall yesterday, high-grade issues remained largely unchanged.
"You're seeing some wider spreads but not much," one high-grade trader said.
The high-yield market lost about 1/2 point.
New Issues
The Federal National Mortgage Association issued $800 million of 5.35% debentures due 1997. Callable after Oct. 10, 1995, the debentures were priced at 99.96875 to yield 5.357%. The offering was handled by the agency's nationwide selling group.
Wal-Mart issued $500 million of 6.125% notes due 1999. The noncallable notes were priced at 99.94 to yield 6.135% or 35 basis points over comparable Treasuries. Moody's rates the offering Aa1, while Standard & Poor's rates it AA. Goldman, Sachs & Co. lead managed the offering.
African Development Bank issued $300 million of 6.750% senior notes due 2004. The noncallable notes were priced at 98.955 to yield 6.88% or 65 basis points over 10-year Treasuries. Both Moody's and Standard & Poor's rate the offering triple-A. Kidder, Peabody & Co. lead managed the offering.
K-Mart issued $200 million of 7.75% debentures due 2012. The noncallable debentures were priced at 99.05 to yield 7.845% or 53 basis points over 30-year Treasuries. Moody's rates the offering A1, while Standard & Poor's rates it A. Morgan, Stanley & Co. lead managed the offering.
Federal Home Loan Banks issued $150 million of 3.65% step-up notes due 1995 at par. The notes are noncallable for a year, after which their coupon steps up to 4.70%. Goldman Sachs sole managed the offering.
United Telephone of Ohio issued $60 million of 6.625% first mortgage bonds due 2002. The noncallable bonds were priced at 99.20 to yield 6.737% or 50 basis points over comparable Treasuries. Moody's rates the offering A2, while Standard & Poor's rates it A-minus. Kidder, Peabody & Co. won competitive bidding to underwrite the offering.
