Marriott bonds slip on doubts about restructuring


NEW YORK -- The Marriott Corp.'s bonds continued to slide yesterday, as debt holders' negative reaction to the company's restructuring plan persisted.

Charles Bishop, a bond analyst at Kidder, Peabody, said, "They just kept widening," referring to the spread between Marriott bonds and Treasury bonds of comparable maturity. The increased spread signifies the increased risk seen by investors in owning Marriott bonds.

On Monday, Marriott said it planned to split into two public companies by mid-1993. One company, Marriott International Inc., would focus on managing hotels, while the other, to be called Host Marriott Corp., would inherit the company's portfolio of property and a $2.9 billion debt load.

Mr. Bishop said part of the reason for the continued decline of Marriott bonds yesterday might have been technical. Many investors cannot hold junk bonds in their portfolios. Yesterday, Moody's Investor Services downgraded some Marriott bonds to the speculative, or junk-bond, level.

Standard & Poor's said it was reviewing Marriott's bonds for possible downgrading to "mid-speculative," or junk, rating.

Robert Nelson, a bond analyst at Standard & Poor's, said that the strength of Marriott's hotel management operations had supported the investment-grade rating to date.

"They are stripping away a very stable business," he said. "Host Marriott will have a lot less cash flow available to service their debt."

A bond trader who asked not to be identified said that several issues of Marriott's medium-term bonds dropped by three to four points each yesterday.

Host Marriott's ability to pay interest on its debts in a timely fashion will affect the value of both companies, analysts said, since Marriott International has pledged to provide a $600 million line of credit, if needed, to Host Marriott.

"The more comfortable people are that Host can finance itself, without having to go to International, that will help the valuations of both companies," said Michael G. Mueller, an analyst with Montgomery Securities in San Francisco.

The stock market's warm embrace of the Marriott restructuring plan faded a bit yesterday, but equity analysts still believe that Marriott will be worth more in two parts. Marriott's stock price fell 12.5 cents yesterday to close at $19.125, after jumping 12 percent Monday. The company was the most actively traded stock on the New York Stock Exchange.

"This enhances shareholder value in the near term and the long term," said Steven A. Rockwell, an analyst with Alex. Brown & Sons.

Most analysts suggest that after the split takes place next year, that the two pieces combined will be worth from $22 to $27 a share.

Most of the value resides in the hotel management company, analysts said.

"There is a very bullish story in the making," said Mark Manson, an analyst with Donaldson, Lufkin & Jenrette.

Marriott is the world's leading operator of hotels. Many other hotel operators have been weakened by the poor economy, giving Marriott an opportunity to pick up lucrative new management contracts.

Marriott must receive a favorable ruling from the Internal Revenue Service that the split will be tax-free to shareholders for the deal to take place. The company must also unravel the complex partnerships that it put together to build some of its hotels.

Mr. Manson and other analysts cautioned that the deal was a complex one and still seven to nine months from completion.

Mr. Manson said investors must take into account the risk that the transaction would not be carried out at all. "There are a lot of legal issues," he said. "I can't assess that risk. If I was sure that the transaction was going to be consummated, I would probably be recommending purchase of the stock much more aggressively."

But most of the doubts concern the real estate company.

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