Marriott faces resistance to restructuring Pressure applied by large investors

November 19, 1992|By Bloomberg Business News

BETHESDA -- Marriott Corp. is coming under increasing pressure from institutional investors, including some of the nation's largest pension funds, to modify or even cancel a controversial reorganization that has bondholders up in arms.

"This thing is going to become unglued," said Thomas Graffeo, investment adviser at Redwood Securities Group, a San Francisco investment group. Mr. Graffeo, among others, cited several pending lawsuits that could tie up the reorganization for months.

"What you're seeing here is a bondholder revolt," said William Benedetto, chairman of Benedetto, Gartland & Greene, a New York investment banking partnership.

"Bondholders [have] organized in such a way that they may overcome the enormous power a corporation has to decide its own destiny," Mr. Benedetto said.

A group of large institutional bondholders filed a suit against Marriott last month, claiming the company committed securities fraud. Court hearings are to begin tomorrow in Baltimore when Judge Alexander Harvey II will hold a preliminary scheduling session at U.S. District Court, said Lawrence Kill, a partner at Anderson Kill Olick & Oshinsky, the firm representing PPM America Inc., one of the bondholder plaintiffs.

Marriott also faces class-action claims filed by smaller bondholders. A group of investors including Teachers Insurance and Annuity Association and California Public Employees' Retirement System, who own $500 million in Marriott bonds, also plan to fight the company.

Marriott suffered another blow Tuesday when its chief financial adviser in the reorganization, Merrill Lynch & Co., resigned amid pressurefrom Marriott bondholders, people familiar with Marriott said. Merrill denied that it bowed to bondholders.

A Marriott spokesman said the hotel company has no plans to modify or drop its restructuring proposal.

Marriott's bondholders lost as much as $360 million in October when their bonds plunged as much as $300 per $1,000 face value after the company said it would split its operations in two, a move designed to benefit shareholders.

Marriott International Inc. would consist of the company's lucrative hotel management business and would be largely debt-free. Host Marriott Corp. would include the company's money-losing real estate, airport and toll road concessions and would have $2.9 billion of debt.

If bondholders prevail, it would be the first time in recent years that they wielded so much influence over a company that is not bankrupt.

Generally, corporations have a fiduciary responsibility to protectshareholders but only a contractual obligation to make interest and principal payments to bondholders.

Bondholders sued RJR Nabisco after the company's $29.6 billion leveraged buyout in 1989 sent their investments plummeting. The suits were rejected because RJR Nabisco didn't default on its bonds.

The Marriott case may be different because the hotel company sold $400 million of bonds in April. No mention was made of the restructuring in Marriott's prospectus for the sale. A group of investors, led by PPM America, claimed Marriott was working on its plan before it sold the bonds and committed securities fraud because it had an obligation to disclose those plans to potential investors in its prospectus.

"There is a question in the law as to how far along plans have to be before you reveal that to bondholders," said Philip Dybvig, professor of finance at Washington University in St. Louis.

"If this was their plan [in April], the company should have let bondholders know about it, given the laws we have."

The PPM lawsuit also may have played a part in Merrill's leaving the transaction, said Jack Coffee, a professor at Columbia Law School. "When professionals start backing out, you get the sense there might be liability here," he said.

Merrill also may have dropped out because some institutions pared their business with the firm last month in retaliation for losses in Marriott's bonds.

Marriott Chief Financial Officer Stephen Bollenbach said last month that the plan to break up the hotel chain was his idea, not Merrill's. Merrill was "getting terrible heat" from bondholders, Mr. Bollenbach said. He called pressure from bondholders "economic coercion."

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