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Fate of Campeau Corp. Bonds Unknown, But Few Small Investors Hurt

January 21, 1990

NEW YORK (AP) _ The bankruptcy filing of Campeau Corp.‘s U.S. department store divisions last week came as no surprise to the bond market, and few small investors should be hurt by the damage done to the Campeau divisions’ bonds.

Not many individual investors are believed to own bonds issued by Federated Department Stores Inc. and Allied Stores Corp., except indirectly through mutual funds.

″Most of it was sophisticated investors, big investors,″ said Pam Stubing, an analyst for Moody’s Investors Service Inc.

Even investors in junk-bond mutual funds that hold Allied and Federated bonds should not see the value of these funds hurt by the Chapter 11 filing of the department stores. That’s because the funds typically have less than 1 percent of their assets in any single bond issue.

For example, far less than 1 percent of T. Rowe Price’s high-income, or junk-bond, fund consists of bonds from Allied and Federated, said Jane Nelson, a spokeswoman for the big Baltimore-based mutual fund operator.

Neither Price nor Fidelity Investments, another major mutual fund sponsor, reported much concern from investors in their junk-bond funds over the bankruptcy filing.

″People sort of knew what was going to happen. It’s not as though it was a surprise out of the blue,″ said Tracy Gordon, a spokeswoman for Boston-based Fidelity.

The impact of the filing was muted further by the fact that these bonds have been trading far below their issue price for months due to concern over Campeau’s troubled finances.

In fact, many of the bonds have been trading at one-tenth of the price they sold for originally. Because of that and the assumption by many that a bankruptcy reorganization was a foregone conclusion, the price of the bonds was little affected by the actual filing.

However, the bonds began trading on a ″flat″ basis after the filing. When bonds trade flat, a seller does not receive any of the accumulated interest from the buyer.

Bonds typically pay interest only twice a year. Because of this, if a bond is purchased, for example, three months after its last interest payment, the purchaser would have to pay the seller prorated interest.

When a bond trades flat it indicates investors don’t expect to see any interest payments.

It appears the biggest losers from the Allied and Federated filings could be the institutional investors and investment houses that bought large blocks of the bonds.

Among the major creditors listed in the bankruptcy papers were First Boston Corp., State Street Bank, Manufacturers Hanover bank and PaineWebber Inc.

The par, or face, value of Allied’s publicly traded debt securities totals about $1.2 billion, while the figure for Federated is about $2 billion, said Ms. Stubing, the Moody’s analyst. However, the actual worth of these issues is far less because they are trading below their issue price.

Ms. Stubing said she believes the Allied and Federated bondholders will see some return for their investment despite the fact the divisions are nearly $8 billion in debt.

″I’m reasonably optimistic that they will get something for their pain and effort,″ she said. ″After all, the stores are not to blame in this thing, the debt is to blame.″

But things won’t be smooth during the reorganization, which could take more than a year, she said.

″It’s going to be a very complex thing. There’re a lot of entities involved and a lot of cross-ownership between Allied and Federated.″

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