Slugfests: The Debt Load Is At The End Of The Hall

Want to know why bondholders are the poor relations of the investing world? Take the hapless souls who checked their money into Marriott bonds. Last fall, the company announced that it would split into a highly profitable hotel operator and a so-so hotel-property owner--and load most of its $2.9 billion debt onto the weaker half's balance sheet. Marriott bond prices subsequently plunged 35%, while the stock surged by about the same amount. So, a bunch of bondholders sued, claiming they had lost $40 million.

Now, the deal is almost set to go through, because bond issuers hold all the cards in disputes like this. Marriott has mollified many of its bondholders by shifting some of the debt to the hotel-operating arm and exchanging their paper for new issues paying one percentage point more in interest. When too few bondholders signed up for the exchange in two classes of bonds, Marriott just changed the rules: It would take less than the 51% of the paper it sought. While the bondholder suit is still on, Marriott likely will get off cheap in a settlement.