MOODY'S CONFIRMS RATINGS OF TRAVELERS GROUP INC. (SENIOR AT Aa3); REVISES OUTLOOK OF SMITH BARNEY HOLDINGS INC. (SENIOR AT A2) TO POSITIVE; PLACES RATINGS OF SALOMON INC (SENIOR AT Baa1) ON REVIEW FOR POSSIBLE UPGRADE
New York, 09-24-97 -- Moody's Investors Service confirmed the ratings of Travelers Group Inc. (senior at Aa3) and of Smith Barney Holdings Inc. (senior at A2). Moody's also placed the ratings of Salomon Inc (senior at Baa1) on review for possible upgrade and revised its outlook for the ratings of Smith Barney to positive from stable. These actions follow the announcement that Travelers plans to acquire Salomon for approximately $9 billion in stock and to merge it with Smith Barney to form Salomon Smith Barney Holdings Inc. The transaction will be accounted for on a pooling-of-interests basis, and it is subject to customary approvals by Salomon shareholders, regulators, and others.
Moody's said that the proposed combination will change the earnings mix of Travelers, with a greater proportion coming from the company's securities-related operations, which are inherently more volatile than the group's insurance and consumer-finance businesses. Moody's added, however, that the increase in earnings volatility is offset by the enhanced franchise and improved earnings potential of the combined businesses. Travelers' disciplined financial and operational management, and the non-leveraged nature of the transaction are positive credit considerations.
In revising its outlook for the ratings of Smith Barney to positive from stable, Moody's said that the merger with Salomon will provide the combined entity with an earnings stream that, although more volatile, will be more diversified. Salomon Smith Barney will have a higher risk profile and greater financial leverage than Smith Barney currently does. Moody's added, however, that the use of stock to effect the transaction, as well as the larger capital base and the enhanced earnings potential of Salomon Smith Barney help to offset these risks. The ratings will continue to benefit from the company's ownership by Travelers.
Moody's noted that Salomon Smith Barney will have an improved market position in its institutional securities business, as well as solid retail securities and asset management businesses in the United States. The addition of Salomon's global activities to Smith Barney's U.S.-focused franchise should allow Salomon Smith Barney to compete more effectively for international business. However, Salomon Smith Barney will compete against other firms that have better established international operations, including well-developed franchises in global equity underwritings and cross-border advisory work. Progress in strengthening Salomon Smith Barney's franchise in these two areas will be an important factor in any future changes in the rating, Moody's said.
According to Moody's, a smooth integration of the management of the two companies will be key to a successful combination that will allow the firm to build upon its strengths and effectively manage risks. Managing the integration of two large securities firms is a challenge in any case, Moody's said, but it is a particular challenge for Salomon Smith Barney because of the distinct histories and cultures of the two companies, as well as the different risk profile of each firm. Travelers has a good track record in selecting and managing acquisitions, Moody's noted, but this is Travelers' first acquisition of a major institutional securities firm.
The following ratings are confirmed:
Travelers Group Inc. - Prime-1 commercial paper; Aa3 senior; (P)A1 subordinated; "aa3" preferred stock
Smith Barney Holdings Inc. - Prime-1 commercial paper; A2 senior
Smith Barney Inc. - Prime-1 commercial paper
Salomon Swapco Inc - Aaa counterparty
Other ratings of the Travelers group are unchanged.
The following ratings are on review for possible upgrade:
Salomon Inc - Prime-2 commercial paper; Baa1 senior; Baa2 subordinated; "baa2" preferred stock; Baa1 counterparty
SI Financing Trust I - "baa2" preferred stock
Travelers Group Inc. is one of the largest diversified financial services organizations in the United States. Through its subsidiaries, the company is engaged in securities brokerage, asset management and investment banking (Smith Barney), personal and commercial lines property/casualty insurance (Travelers Property Casualty Group), life insurance, annuities, and related products (Travelers Insurance and Primerica Financial Services), and in consumer lending (Commercial Credit). Travelers Group Inc. had total assets of $160 billion and shareholders equity of $14.2 billion as of June 30, 1997.
Salomon Inc is a financial services holding company engaged in the securities industry and commodities trading. Salomon Inc had consolidated assets of $236 billion and stockholders' equity of $5.1 billion as of June 30, 1997.
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