Junk Bonds Fall After Ramada Withdraws Offering

Junk bond prices fell sharply Thursday following Ramada Inc.’s withdrawal Wednesday of a $400-million high-yield debt offering--the latest in a series of negative events to rock the already jittery market.

The market responded dramatically to Ramada’s announcement, with nervous investors selling off even the highest quality issues in the $210-billion market.

“We’re seeing a crisis of confidence in the market,” said Bill Veronda, senior vice president of Financial Progams Inc.

Overall, junk bond prices fell 1 1/4 to 1 1/2 points, equal to $12 to $15 on a bond with a face value of $1,000. Since most junk bonds trade well below their face value, the actual losses were even larger.

On Wednesday, Ramada and its adviser, Salomon Bros., said the issues were being withdrawn due to unfavorable market conditions in the junk bond market.

The junk bond market began weakening during the summer months when several highly leveraged companies were unable to meet interest payments. They include Integrated Resources Inc., Zapata Corp. and Seamans Furniture Corp.

The nervous state of the junk market was exacerbated last month when Campeau Corp. announced that it would undergo a major restructuring and would miss interest payments on debt of its Allied Stores unit. Robert Campeau took over Allied and Federated Department Stores with huge quantities of junk bonds but has run into severe problems in making his debt payments.

“Since the Campeau debacle, tremors have continued to be felt throughout the junk market,” one analyst said.

“Although there is severe worry in the junk bond market, we have yet to see the bad news surface,” said one analyst. He said “if a recession or an extended period of economic sluggishness occurs, we should see many more Campeaus.”

Traders said the disparity in yield spreads between junk bonds and the highly liquid U.S. Treasury bonds is now at record levels of 600 basis points, or six percentage points.

“Bonds are being hit hard by the liquidity situation,” said Veronda, adding that “we’re seeing a flight to quality.” He said many investors are reallocating their holdings into the more secure U.S. Treasury market.