U.S. CORPORATE FINANCE - S/P CUT HAS NO EFFECT
In an unusual move, Standard and Poor's
Corp downgraded a U.S. corporate debt issue soon after it was
priced for offering late last week.
    But, unlike a similar action in September 1986, which
investment bankers said disrupted the financing, the agency's
rate reduction had no effect this time, traders said.
    S and P announced Friday afternoon that it cut to B from
B-plus a 900 mln dlr issue of senior notes due 1994 of Holiday
Inns Inc, a unit of Holiday Corp <HIA>. The notes were priced
late Thursday by sole manager Drexel Burnham Lambert Inc.
    In a release, Standard and Poor's said the action reflected
a change in the note issue's terms to an unsecured form of debt
from secured. That change was made after the agency rated the
notes on February 20, S and P stated.
    "We took action as we became aware that the issue's
structure had changed," said Robert Nelson of S and P. "We
generally make a distinction between secured and unsecured
debt, and this was the key factor in our downgrade."
    A spokesman for Drexel said the action did not affect the
Holiday Inns deal, which had already sold out to investors by
late Friday afternoon.
    "The Holiday notes are trading at 100.50 on a when-issued
basis," the Drexel spokesman said soon after S and P's
announcement. The 10-1/2 pct notes had been priced at par.
    That is a far cry from late September, when S and P
downgraded a 215 mln dlr issue of subordinated sinking fund
debentures due 1998 of New World Pictures Ltd <NWP> just hours
after the pricing. Because of the rating cut to CCC-plus from
B-minus, the underwriter halted sales and repriced the issue.
    Sole manager L.F. Rothschild, Unterberg, Towbin initially
gave the debentures a 12-1/4 pct coupon and par pricing. It
then repriced the issue at 97 to yield 12.74 pct.
    New World Pictures had increased the issue to 215 mln dlrs
from an original offering of 150 mln dlrs, and that brought in
S and P. The agency cited the larger financing in its action
and said it believed the issuer's cash from existing operations
would not be enough to adequately service debt.
    An officer with S and P said at the time the rating agency
was not told beforehand that the issue had been increased in
size. Usually, issuers and underwriters alert the rating
agencies to any changes in debt offerings, he said.
    In both cases, Moody's Investors Service Inc declined to
follow suit, bond traders noted.
    Indeed, Moody's announced Friday that its original rating
of B-1 for the Holiday Inns notes remained appropriate.
    Moody's pointed out that while the seven-year notes would
be unsecured obligations of Holiday Inns, the issue would
benefit from a negative pledge provision and a call for
specified collateral under certain circumstances.
    The agency also said the B-1 rating continued to recognize
a highly leveraged debt structure that would result from
Holiday's recapitalization program, as well as the company's
dependence on property sales to produce adequate cash flow for
near-term debt service.
    "Aside from Holiday Inns and New World Pictures, I cannot
remember the last time an issue was downgraded so soon after
the pricing," remarked one corporate bond trader.
    Holiday Inns also sold Thursday via Drexel 500 mln dlrs of
subordinated debentures due 1999 with an 11 pct coupon and par
pricing. The debentures' ratings of B-2 by Moody's and B-minus
by S and P were left unchanged on Friday.
    The combined offering of 1.4 billion dlrs was the
second-largest junk bond deal ever brought to market,
underwriters and traders said. They said the biggest was BCI
Holdings' 2.35 billion dlr offering on April 10, 1986.
    That the Holiday Inns deal sold out quickly underscored the
appetite of many investors for high-yield securities.
    "People are hungry for yield. They are not worried about
downside risk at all, especially for junk bonds issued by
well-known companies," said one portfolio manager.
    As a result, investors are expected to snap up this week's
planned offerings by Allied Stores Corp of 200 mln dlrs of
senior notes due 1992, rated B-2/B, and 600 mln dlrs of senior
subordinated debentures due 1997, rated B-3/CCC-plus.
    Lead underwriter First Boston Corp said Friday it has
tentatively scheduled the securities for pricing today.
 Reuter
