Following the lead of Moody's Investors Service, Standard & Poor's Corp. downgraded Salomon Inc.'s debt yesterday, a move scandal-plagued Salomon said would raise its borrowing costs slightly.
That aside, the agency's action "will have no significant impact on the firm's overall liquidity, which remains strong," Salomon said in a statement issued following the downgrade.
The agency said the downgrade was prompted by Salomon's diminished financial flexibility after its subsidiary, Salomon Brothers, admitted to Treasury auction violations.
Standard & Poor's lowered Salomon's senior long-term debt rating to A, from A-plus; subordinated debt rating to A-minus, from A; and preferred stock rating to BBB-plus, from A-minus.
Salomon's A1 commercial paper rating was not lowered, but, along with the revised long-term debt and preferred stock ratings, it remains on CreditWatch for a possible downgrade.
"The real issue here is confidence," said Mark Bachmann, a Standard & Poor's senior vice president.
New management is "aggressively" attempting to reinforce internal controls and distance the firm quickly from the conditions that led to the scandal, Standard & Poor's said.
"We think that they have it reasonably well under control," Mr. Bachmann said.
However, the long-term rating reduction reflects some lingering bruises to the firm's reputation, as well as litigation costs and possible government fines, the agency said.
Mr. Bachmann added that, while he did not expect any, additional revelations of illegal activity would trigger further downgrades.
Asked why Standard & Poor's lagged Moody's by about a week, Mr. Bachmann said his agency wanted to make its assessment when it had as much information about the unfolding situation as possible.
In its statement, Salomon emphasized a portion of the Standard & Poor's assessment.
"It is [Standard & Poor's] opinion at this time that Salomon's fundamental operations remain sound and thus far have not been irreparably damaged by the present circumstances," that part of the agency's report reads.
In the asset-backed arena, Chrysler Financial Select Auto Receivables Trust 1991-3 issued more than $624 million of 7% certificates maturing in 1996 and priced at 99.859375 to yield 7.187%. Merrill Lynch & Co. assisted by several other firms, managed the transaction. The certificates were rated Aaa by Moody's and AAA by Standard & Poor's.
Over all, the investment-grade market was down about 1/4 point. The junk market was basically unchanged.
"The market is still extremely strong. Technicals are superb," one high-yield trader said, adding that a good deal of paper continues to be taken off the market.
"Supply is disappearing pretty quickly," the trader said.
But though the market thirsts for new supply, not just any paper is welcome, one high-yield analyst said.
Investors want higher-quality paper with a good story, a desire stemming from regulatory pressures and lessons learned from bad deals done earlier, he said.
Following an announcement that the bank would take a $175 million special charge in the third quarter, Duff & Phelps Inc. has placed the ratings of Continental Bank Corp. and its subsidiary, Continental Bank NA, on ratings watch for a possible downgrade.
Ratings affected are Continental Bank Corp.'s BBB-plus senior debt rating, BBB subordinated debt rating, BBB-minus preferred stock rating and Duff 2 commercial paper rating, as well as Continental Bank NA's Duff 1-minus short-term deposit rating and A-minus long-term debt rating.