Moody's B1 Doesn't Keep Investors From Perking Up at Offering by Varity

Varity Corp.'s $150 million offering was garnering big investor demand late yesterday despite a lower-than-expected rating from Moody's Investors Service Inc., sources familiar with the offering said.

The deal was expected to be priced either last night or this morning, they said. That news followed some unconfirmed reports that the Moody's rating had forced the company to add yield and increase call protection.

Price talk earlier on the senior notes due 1998 was 11.50%, while one analyst yesterday heard 12 1/4% to 12 1/2%.

As Varity ended its roadshow last Friday, Moody's announced it's B1 rating, lower than the BB rating Standard & Poor's Corp. had assigned earlier, a company spokeswoman said.

"We had hoped for a somewhat better rating," the spokeswoman said, but added, "I don't think its going to affect the deal significantly."

But Sean T. St. Clair, an analyst with Duff & Phelps/MCM Investment Research Co., predicted earlier that the company would have to offer a higher yield to attract investors.

"Given our view of the default risk, we consider the new Varity senior note issue to be unattractive at current yields of less than 12%," he said.

Carol Verschell, a Moody's assistant vice president, said Moody's assigned a B1 rating to the senior note issue because of the company's high leverage, relatively low fixed-income coverage, and limited ability to obtain funds from its subsidiaries to service debt requirements.

"The rating acknowledges Varity's strong core business positions in agricultural equipment, automotive components, and diesel engines," Ms. Verschell wrote. "However, Varity is a holding company in a relatively complex, multitiered organizational structure, which means bondholders are even further removed from the ultimate source of cash flow."

Varity expects to net about $143.7 million of proceeds from the notes' sale. Proceeds will be used to redeem all of its Kelsey-Hayes unit's approximately $124 million of 13 1/4% guaranteed subordinated notes due Nov. 15, 1992.

Overall yesterday, high-yield issues were firm in secondary trading, while investment grades were up slightly.

Among yesterday's new issues was a Student Loan Marketing Association offering, which issued $250 million of floating rate notes due 1994. It was priced at 260 basis points below prime. It floats daily and pays quarterly. Lehman Brothers managed the offering.

Mobil Oil Corp. issued $200 million of 6.750% noncallable notes due 1995 and priced at 99.74% to yield 6.825% or 23 basis over comparable Treasuries. Moody's Investors Service Inc. rates the deal Aa2, while Standard & Poor's Corp. assigns a AA rating. Lehman Brothers managed the offering.

Federal Home Loan Mortgage Corp. issued $150 million of 7.98% debentures due 2001. The debentures were priced at par to yield 50 basis points over comparable Treasuries. Lehman Brothers and Morgan Stanley & Co. co-managed the offering.

As for ratings yesterday, Fitch Investors Service Inc. has rated Deere & Co.'s $1.1 billion of notes and debentures A. The agency also rated two outstanding shelf registrations totaling $475 million A and rated $2 million of convertible subordinated debentures rated A-minus. The company's $487 million outstanding commercial paper is rated F1. It marks the first time Fitch has rated Deere's debt.

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