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Marriott Bondholders Organize To Try To Block Proposed Spinoff

October 15, 1992

NEW YORK (AP) _ Bondholders angered by Marriott Corp.’s proposal to spin off its real estate operations have formed a committee to try to block the transaction.

The 10-member committee, mainly comprised of institutional investors such as pension and mutual funds, expects to choose an attorney by today to explore retaliatory actions, including a possible lawsuit, sources close to the group said Wednesday.

Bondholders were stunned last week when Marriott announced it would spin off its real estate operations into a separate, debt-laden business called Host Marriott Corp. The move would give most of the old company’s revenue to a much healthier company, called Marriott International Inc., that will manage Marriott’s vast hotel chain.

Following the announcement last Monday, Moody’s Investors Service Inc. downgraded investment grade Marriott bonds to junk status. The value of these bonds tumbled.

Increased debt loads often prompt the bond-rating companies to lower ratings for bonds because the higher debt raises questions about the company’s ability to pay.

When a bond’s rating is lowered, its price usually falls.

Bondholders say the proposed corporate makeover violates a time-honored assumption: that the revenues backing bonds would not be unexpectedly diverted to other needs.

″We think it is at least intellectually wrong and my best guess is that it is so flagrant that it may very well be constituting a fraudulent conveyance,″ said one source close to the bondholders’ group, who spoke on condition of anonymity.

The group will be reading closely Marriott’s upcoming proxy statement to shareholders, which will explain more details of the spin-off so shareholders can be more informed when they vote on it at Marriott’s annual meeting in May. Proxy statements typically are sent out a few months ahead of annual meetings.

Separately, two bond investors have filed suits against Marriott Corp., alleging the Bethesda, Md.-based company misled them and other debt holders by selling bonds without dislosing its intention to split its business. The two suits were filed last Friday as class actions in federal court in Baltimore.

The Marriott proposal also has sent chills through the corporate bond market in general, raising fears that other companies may be considering spin- offs that would hurt the value of bonds. There has been a lackluster response to recent corporate bond issues, with some issuers forced to offer higher yields to try to lure jittery investors.

Marriott spokesman Robert T. Souers said he wasn’t aware of any organized move by angry bondholders.

But he defended Marriott’s proposed spin-off, saying the corporation’s legal obligation is to stockholders, who will benefit from the plan. He also said the chain intends to fulfill its main commitment to bondholders, which is to make timely interest and principal payments on the bonds.

Souers also noted that Marriott plans to establish a $600 million line of credit from Marriott International, the healthier unit, that Host Marriott can use for expenses - including bond payments.

Moreover, he said, ″We believe Host Marriott will have more than enough cash flow to meet those (bond) obligations.″

It would not be the first time bondholders have taken action against a corporation over an unexpected restructuring. Three years ago Hartford Insurance Group, the insurance unit of ITT Corp., sued RJR Nabisco Inc. over its buyout plans. The suit, settled out of court, alleged the insurer lost about $2.25 million in the value of its $25 million worth of RJR Nabisco bonds after the buyout was announced.

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