Marriott 'disaster' reveals risk of corporate bonds

November 09, 1992|By Ellen James Martin | Ellen James Martin,Staff Writer Bloomberg News Service contributed to this article.

To bond investors, traders and analysts, it's come to be known as the "Marriott fiasco." And it has raised fears that big investors may steer clear of the corporate bond market.

Bethesda-based Marriott Corp. announced Oct. 5 that it would split into two, giving the new company, Marriott International Inc., a virtually clean balance sheet and leaving the old company, renamed "Host Marriott," with almost all of Marriott's real estate and $2.9 billion in debt, including its bond issues.

The announcement of the split -- planned to occur next year -- caused a "trashing" of Marriott's bonds, which lost 30 percent of their value in the immediate aftermath and unleashed an uproar from bondholders. Loading all the debt onto Host Marriott made the formerly gilt-edged bonds into high-risk issues despite company reassurances that Host Marriott intended to meet its obligations to pay interest and principal.

A formidable list of institutional investors were enraged by the Marriott restructuring and its impact on their investments. Twelve of the nation's biggest institutions, which own $500 million of Marriott's bonds, formed a steering committee to battle the Marriott plan. The 12 include two of the country's biggest pension funds, Teachers Insurance and Annuity Association and California Public Employees' Retirement System; insurance giants Allstate Insurance Co. and CNA Insurance; and mutual fund companies Kemper Financial Services and IDS Financial Services.

In addition, a number of lawsuits have been filed by institutional and individual investors seeking to block the move.

"This was a big disaster that focused people's attention on the risks of the industrial market," observed James Drury, a Prudential Securities bond analyst in New York.

Institutional investors -- many of whom restrict themselves to the purchase of investment-grade bonds -- will be a lot more wary in the future about what a bond user such as Marriott might attempt, Mr. Drury predicted.

"In the past, the high-grade department operated kind of like a suburban neighborhood. Everybody sat there with their front doors open. They didn't expect people to come in their homes and take their TVs. Marriott not only took the TV, it took the silverware, the rugs and the couch," Mr. Drury said.

Bondholders feel especially betrayed, he said, because stockholders will benefit by receiving shares in the new, more valuable company. Since the announcement, Marriott's common stock has risen almost 25 percent, from $17.125 to $21.25.

"They got Marriott shareholders dug out of their hole, but they put the bondholders down the elevator shaft. It was a very, very slick move," Mr. Drury said.

Marriott's restructuring plan "does substantially weaken the bondholders' position by stripping away from the firm the lucrative hotel management and contract services businesses and leaving bondholders with a capital-intensive and cyclical business -- predominantly hotel ownership," said Robert C. Nelson of Standard & Poor's, which rates bonds.

Indeed, Mr. Nelson said he and other Marriott analysts think that the restructuring plan "does increase the risk of bankruptcy" for Host Marriott, the renamed company bearing most of the debt and real estate.

But Terry Souers, a Marriott spokesman, said the way Marriott was restructuring would prevent Host Marriott from facing bankruptcy.

"When we structured the transaction, we wanted to make sure that Host Marriott was going to be able to meet all of its obligations and that it would have sufficient cash flow to do so. We don't think bankruptcy is a possibility," Mr. Souers said, noting that Host Marriott will also have a $600-million line of credit from Marriott International "should our projections be wrong."

With a future improvement in the real estate market, the outlook for Marriott's bonds should improve, Mr. Souers predicted.

Marriott's chief financial officer, Stephen Bollenbach, who masterminded the plan, also sought to reassure investors last month.

"We intend to live up to obligations, including payment of interest and principal when due," said Mr. Bollenbach, who will become president and chief executive of Host Marriott. Marriott should be able to meet its obligations "by a comfortable margin."

He told investors the Marriott family had an interest in ensuring that Host Marriott didn't go bankrupt. The Marriotts will own 25 percent of Host Marriott's stock, and Richard Marriott will be chairman.

Moges Gebremarian, a Baltimore investor who is among those who filed suit to block the split, said Mr. Bollenbach's comments didn't appease him.

"I don't care what he said. It's not going to help the bondholders," Mr. Gebremarian said. "The deal is still unfair. Marriott is dumping all the debts into half the company, and I am going to own that half of the company. I bought Marriott bonds based on the good faith and reputation of the whole company, not its bad half."

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