Cendant, PHH Rtgs Lowered by S&P; Off CreditWatch.

NEW YORK--(BUSINESS WIRE)--S&P's CreditWire 10/16/98--Standard & Poor's today lowered its ratings of Cendant Corp., wholly owned subsidiary PHH Corp., and related entities as listed below. All ratings are removed from CreditWatch, where they were placed with negative implications in March 1998 due to Standard & Poor's concern about the pace and scope of acquisitions.

The PHH ratings recognize the company's newly strengthened firewall between itself and its parent, and enable Standard & Poor's to permit a two notch differential between PHH and Cendant's corporate credit ratings. Covenants that limit intercompany borrowings and dividends to a total of 40% of PHH's net income for the prior 12 months, restrict leverage to a maximum of 8 to 1, and require two-thirds bondholder approval have now been incorporated into its medium-term note indenture.

The downgrades reflect the discovery of accounting irregularities at the CUC International Inc. unit subsequent to the CreditWatch listing (which caused a material loss in market value and earnings at Cendant), the company's flawed acquisition strategy including and subsequent to the CUC merger, and a potentially more aggressive financial policy given a significantly reduced share price.

The accounting fraud at CUC and the resulting impact on Cendant's share price, credibility in the financial marketplace, and business strategy, will be felt for some time. Standard & Poor's believes that the CUC businesses will require attention to build member retention and profitability levels. Cendant also recently canceled its American Bankers Insurance Group Inc. (ABI) and Providian Auto and Home Insurance Co. transactions. A $400 million break-up fee will be paid to ABI.

Cendant's investment-grade rating is supported by a diverse portfolio of businesses with strong cash-generating characteristics and a still moderately leveraged balance sheet, mitigated by significant near-term issues, including shareholder litigation and shareholder value pressures in light of its sharply lower share price. Besides CUC, the company's other businesses are performing well. The franchising businesses still have attractive credit characteristics, including substantial diversity, lack of real estate exposure, high operating margins, and low capital requirements. The PHH businesses (vehicle management, mortgage origination, and relocation) are leaders in their respective fields, and many cross-marketing benefits and synergies have been realized with the old HFS business units. PHH's ratings are supported by its strong market leadership and asset quality measures, and acceptable leverage. Its historically strong asset quality measures stem from the high creditworthiness of the firm's customer base. Credit underwriting standards have consistently remained strong, and profitability has improved since the company was acquired.

Over the near-to-medium term, Cendant's focus will be on maximizing internal growth, rationalizing and divesting some businesses, improving performance of the former CUC units, and repurchasing shares. Although a number of Cendant's recent acquisitions were increasingly funded with cash, the company's leverage remains moderate. Debt levels at June 30, 1998 were about $4 billion, redeemable preferred stock was $1.5 billion, and cash balances were about $1.5 billion. Restated earnings before interest, taxes, depreciation, and amortization for the six months (EBITDA) ended June 30, 1998, excluding the PHH cash flow (which supports its own debt), were about $600 million. A $3.25 billion term loan matures in May 1999. Cash on hand, along with anticipated public debt offerings, is expected to refinance this loan.

The company is expected to receive proceeds of over $1 billion when the sale of Hebdo Mag closes and the CUC software business is sold in 1999. The uses of cash will include the $400 million ABI break-up fee, $750 million for the RAC acquisition next year, if approved by regulators, and a recently announced $1 billion share repurchase program. Flexibility is provided by an undrawn $1.8 billion revolver and significant free cash flow generation in excess of operating needs.

OUTLOOK: DEVELOPING

Uncertainties still exist regarding the types of consideration and ultimate settlement size of the pending shareholder litigation claims, which could be significant. Also, the extent of future share repurchases beyond the $1 billion already announced is unclear. Still, the company generates a significant amount of free cash flow and can sell assets to manage its debt levels. The rating has upside potential if the company is successful in executing its new business strategy, demonstrates a consistent earnings record during 1999, continues to maintain strong credit measures, and the shareholder lawsuits are settled favorably. However, more aggressive efforts to enhance shareholder value or an unfavorable settlement could result in a downgrade.--CreditWire

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RATINGS LOWERED AND REMOVED FROM CREDITWATCH

Cendant Corp.                      To             From
  Corp credit rtg                  BBB            A
  Sr unsecd debt                   BBB            A
  Pfd stk                          BBB-           A-
  Shelf debt (prelim)              BBB/BBB-       A/A-
PHH Corp.
  Long-term counterparty rtg       A-             A+
  Short-term counterparty rtg      A-2            A-1
  Sr unsecd debt                   A-             A+
  CP                               A-2            A-1
CUC International Inc.
  Sub debt (gtd: Cendant Corp.)    BBB-           A-

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