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Standard & Poor’s Downgrades Salomon Inc., Cites Weak Earnings

August 16, 1995

NEW YORK (AP) _ A major credit-rating agency on Wednesday lowered its opinion of Salomon Inc., citing a big quarterly loss at the Wall Street firm and problems in retaining top investment bankers and other staff.

Standard & Poor’s Ratings Group downgraded $15 billion in long-term Salomon debt to a low investment grade and cut the investment firm’s preferred stock to ``junk″ status.

Companies nearly always frown on downgrades, which deem them bigger investment risks and tend to prompt investors in their bonds to demand higher yields. Wall Street investment banks are particularly sensitive because they regularly borrow huge sums to finance their investments.

But the parent of Salomon Brothers Inc., while saying in a statement it was ``extremely disappointed″ with S&P’s action, said the downgrade would have a ``relatively small impact″ on funding costs.

``I think from the financing standpoint, the markets were most likely anticipating it,″ said Joan Solotar, an industry analyst at Donaldson, Lufkin & Jenrette Securities Corp. ``While the company was disappointed, it didn’t come from left field.″

Salomon bonds, though not actively traded Wednesday, were expected by market players to rise in yield by as much as 0.10 percentage point over comparable U.S. Treasury bonds, according to Technical Data bond analyst John Atkins. That added interest was a reflection of increased risk to holders.

The ratings action comes one month after S&P warned that Salomon’s ratings might be lowered in response to the firm’s projection in early July of a big second-quarter loss. Salomon’s quarterly loss was $60 million, contrasting sharply with rebounds at rival Wall Street firms from woeful 1994 levels.

Standard & Poor’s noted that profits in businesses on behalf of Salomon clients were not enough to offset losses in commodities trading and in proprietary trading, or in trading of securities for Salomon’s own account. Salomon is a giant player in proprietary bond trading but recently has bolstered its client-driven businesses, which include investment banking and trading securities for customers.

The credit-rating agency said that Salomon’s bid to return to profitability is getting hampered by defections of top-performing staff from its investment banking and trading departments. Volatility in Salomon’s proprietary and commodities trading added further uncertainty to earnings. Salomon posted a nearly $400 million loss for all of 1994.

Salomon, though, said it regarded the strong second-quarter performance of its client businesses as ``a key turning point″ reflecting management changes and better risk management.

S&P lowered Salomon’s senior debt to BBB from BBB-plus, subordinated debt to BBB-minus from BBB, and preferred stock to BB-plus from BBB-minus. Investors in senior-level debt have a higher priority of repayment than investors in subordinated debt.

The rating BBB is the fourth-highest of 10 letter grades used by S&P, with the top possible rating an AAA. S&P uses a plus or minus after a letter to show relative standing within a group.

A rating below BBB denotes a speculative investment. Many institutional investors, such as trust accounts, are restricted to investment grade securities.

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