A top Marriott Corp. official's assurance that Host Marriott Corp. will start with a healthy cash flow appeared to offer bondholders little solace yesterday.
"I think that's good PR over there," one trader of Marriott bonds said.
Since Marriott's Oct. 5 announcement that it planned to split operations into two companies, with Host Marriott Corp. getting most of the debt, the company's 9 1/2% bonds of 2002 have lost about 24 points, the trader said.
Stephen F. Bollenbach, Marriott's chief financial officer, told those attending a bond conference yesterday in Boca Raton, Fla., that Host Marriott will have a healthy cash flow when it begins operations in mid- 1993, according to a Marriott press release.
"As we developed this transaction, we worked hard to balance the interests of our various stakeholders - including employees, lenders, property owners, franchisees, and shareholders. In our opinion, we have done that." Bollenbach said during the conference, which was sponsored by Donaldson, Lufkin & Jenrette Securities Corp.
"We intend to live up to our obligations, including payment of interest and principal when due, and firmly believe we have structured the transaction to achieve this objective by a comfortable margin," Bollenbach said.
If Host Marriott had been a separate company in 1991, before interest expense, taxes, and working capital changes, it would have had operating cash flow of approximately 307 million. That compares to about $350 million expected in 1992, a 14% increase over 1991.
The other new company, Marriott International Inc., will include Marriott's lodging, food and facilities management, and senior living services operations.
Host Marriott will get Marriott's real estate properties and its airport and toll road concessions business.
Marriott will accomplish the split through a special dividend. Shareholders will then have an identical number of shares in each company.
Host Marriott will have considerable flexibility when it comes to its financial obligations, Bollenbach said. Healthy cash flows from Host-/Travel Plazas operations and real estate properties, including 141 hotels and 16 retirement communities managed by Marriott International, will help Host Marriott meet its obligations.
They can also provide the basis for future refinancings.
Host Marriott can use proceeds from real estate transactions to augment strong cash flow from operations, he said.
And although Bollenbach does not believe Host Marriott will need it, Marriott International will provide it with a $600 million revolving credit line through December 1997.
Bollenbach also said, the Marriott family, which will hold about 25% of Host Marriott's stock. is committed to that company's success.
Marriott's current vice chairman, Richard E. Marriott, will become chairman of Host Marriott Corp. J.W. Marriott Jr., now chairman, president, and chief executive officer of Marriott Corp., will retain those posts in Marriott International. The two will be directors of both companies. Bollenbach will become Host Marriott's president and chief executive officer.
Bollenbach also said that some of the problems that plagued the travel industry in 1991 were absent in 1992, including the Gulf War and airline bankruptcies. He expects this year to be a "considerably better year" for the planned Host Marriott's businesses.
More growth is expected in 1993, as many of Marriott's newer hotels and retirement communities start reaching stabilized occupancies. Also, the Host/Travel Plazas business, which runs food, beverage, and merchandise concessions at airports and on toll roads, expects 1992 operating cash flow to be about $120 million before interest expense, taxes, and working capital changes.
Also, Marriott's newly acquired Dobbs airport concessions should mean about $20 million of additional annual cash flow.
On a pro forma basis in 1992, Host Marriott would have had about $2.9 billion of long-term debt, with an average interest rate of 8% and a seven-year average maturity. Bollenbach estimated Host Marriott's annualized interest expense to total roughly $225 million.
About $100 million of capital will be needed each year to maintain the Marriott's real estate and to maintain and build up the business of Host/Travel Plazas, he said.
On a pro forma basis, Host Marriott assets would have totaled about $4.6 billion in mid-1992. Bollenbach explained that the net property and equipment component would have been about $3.3 billion, of which approximately $2 billion would be assets owned free and clear by Host Marriott.
Among other things, the planned split hinges on approval from Marriott's board of directors, a majority of its shareholders, and the Internal Revenue Service for the special dividend to be tax-free to shareholders.
In other news yesterday, the U.S. Postal Service and Treasury officials were unable to reach agreement during a meeting on the Postal Service's efforts to restructure its debt, according to a Postal spokesman.
"We can say that we are open to further discussions with Treasury," the spokesman said.
The Postal Service wants to issue callable bonds in the public marketplace, which the Treasury opposes.
In secondary trading yesterday, high-grade bonds ended unchanged while high-yield bonds finished down about 1/8 point.
The Student Loan Marketing Association issued $500 million of floating rate notes due 1997 at par. The notes float weekly at 35 basis points over three-month Treasury bills. Morgan Stanley & Co. lead managed the offering. HJ Heinz issued 300 million of 6.750% notes due 1999 at par. The noncallable notes were priced to yield 43 basis points over comparable Treasuries. Moody's Investors Service rates the offering Aa2, while Standard & Poor's Corp. rates it AA. Dillon Read lead managed the offering.
Union Electric issued a two-part first mortgage bond issue totaling $204 million. Tranche A consisted of $100 million of 6.750% bonds due 1999. The noncallable bonds were priced at 99.548 to yield 6.832% or 55 basts points over comparable Treasuries.
Tranche B consisted of $104 billion of 8.250% bonds due 2022. Noncallable for 10 years, the bonds were priced at 98.965 to yield 8.344% or 76 basis points over comparable Treasuries. Moody's rates the offering Al, while Standard & Poor's rates it AA-minus. Salomon Brothers Inc. lead managed the offering.
CIT Group issued $100 million of floating rate medium-term notes due 1993 at par. The floats daily at 255 basis points under Prime and pays quarterly. Moody's rates the offering Al, while Standard & Poor's rates it A-plus. Merrill Lynch & Co. managed the offering.
First Financial Corp. issued $55 million of 8% subordinated notes due 1999 at par. Noncallable for three years, the bonds were not rated by Moody's and rated BB-plus by Standard & Poor's. Robert W. Baird & Co. lead managed the offering.
Duff & Phelps Credit Rating Co. has given a BBB-minus rating to Long Island Lighting Co.'s expected $451 million debentures offering from a recent shelf registration.
After the sale, about $255 million general and refunding bonds, rated BBB, or debentures would remain available, a Duff & Phelps release says.
The lighting company may use proceeds to repay bank debt and refund high-cost securities, as well as for other corporate purposes.
"LILCO's financial protection measures are expected to improve gradually under the current three-year electric rate plan," the release says.