RJR Nabisco Inc.'s 13 1/2% junk bonds sank 2 5/8 points yesterday immediately following a Supreme Court ruling on cigarette makers' liability, one analyst said.
But the cigarette maker's 13 1/2% subordinated debentures due 2001 rallied to finish down about a point at day's end, according to Jake Foley, a senior analyst in Paine Webber Inc.'s high-yield research group.
"It's not an absolute victory, it's not an absolute loss," he said of the ruling's meaning for cigarette companies. "It's a partial victory."
While the ruling says cigarette companies won't have to face state-law claims asserting that advertisements showing young, healthy people offset the effect of cigarette pack warnings the government began requiring in 1965, conspiracy and negligence issues remain unaddressed, Mr. Foley said.
Also unaddressed is the issue of "express warranty" before 1965, he said. Mr. Foley explained express warranty as "tacitly telling one that it is healthy to smoke."
RJR Nabisco's zero coupon bonds also dropped following the announcement, he said. They lost about two points to hit 90 5/8% to 90 7/8%. Those bonds also recovered to finish down about 1/2 point on the day, he said. The company's pay-in-kind debentures surrendered about two points following the announcement and finished down 2 1/4 points on the day, Mr. Foley said. He said, however, that those bonds had been priced somewhat richly to begin with.
"I think people are going to adjust their values down on uncertainty," Mr. Foley said, "You now have more questions than answers.
"It leaves some modest uncertainty, not devastating uncertainty," Mr. Foley said.
He added that tobacco company bonds could come under more pressure if recently subpoenaed records from The Council For Tobacco Research indicate that companies knew of cigarette smoking's dangers earlier than was revealed.
Edward Mally, director of high-yield research at Salomon Brothers, however, saw the ruling as more of a positive. The ruling "now removes an element of uncertainty," he said, adding that it was in line with expectations. It removes an area of "heightened concern" for the industry, Mr. Mally said.
On the investment-grade side, traders reported little activity in cigarette companies' bonds. Immediately following the Supreme Court announcement, a "flurry" of bids came in for various Philip Morris Companies Inc.'s bonds as potential buyers tested the waters. No discernible trading followed, however.
"Nobody really bought into those lower bids," one trader said late yesterday.
One high-grade trader said tobacco bond spreads had widened by 10 to 15 basis points earlier, but then tightened to "about a nickel wider" than the previous day's close by early afternoon.
"These companies are global companies with big product bases and big cash flows," he said.
In secondary trading overall, high-grade bonds gained 1/8 to 1/4 point, while high-yield bonds ended unchanged.
Korea Electric Power issued $300 million of 8% notes due 2002. The noncallable notes were priced at 99.256 to yield 8.11%, or 90 basis points over comparable Treasuries. Moody's Investors Service rates the offering A1, while Standard & Poor's Corp. rates it A-plus. Lehman Brothers lead managed the offering.
Eastman Kodak issued $275 million of 7.25% senior notes due 1999. The noncallable notes were priced at 99.05 to yield 7.426%, or 65 basis points over comparable Treasuries. Moody's rates the offering A3, while Standard & Poor's rates it A-minus. Merrill Lynch & Co. lead managed the offering.
KC Southern Industries issued a two-part offering totaling $200 million. The first tranche consisted of 7.875% senior notes due 2002. The noncallable notes were priced at 99.07 to yield 8.012%, or 80 basis points over comparable Treasuries. The second consisted of $100 million of 8.8% senior debentures due 2022. Noncallable for 10 years, the debentures were priced at 99.28 to yield 8.869%, or 104 basis points over comparable Treasuries. Moody's rates the offering Baa2, while Standard & Poor's rates it BBB-plus. Merrill Lynch lead managed the offering.
Federal National Mortgage Corp. issued $150 million of 5.50% medium-term notes due 1995. Noncallable for a year, the notes were priced initially at par to yield eight basis points over comparable Treasuries. Goldman, Sachs & Co. sole managed the offering.