Calpine debt up on financing plans; Intermet bonds continue skid

By Paul Deckelman and Sara Rosenberg

New York, Sept. 23 - Calpine Corp.'s second-lien loan was seen about a point better on the day after the company revealed plans to sell convertible notes and first-priority senior secured notes.

Interstate Bakeries Corp.'s bank debt steadied, a day after the Kansas City, Mo.-based baker's Chapter 11 filing, calmed perhaps by the news that its debtor-in-possession lenders will give the maker of Wonder Bread the dough it has requested.

In bond trading, automotive components maker Intermet Corp.'s bonds continued to slide for a fourth straight session and now stand about 40 points below where they started the week.

A trader watching Calpine's paper told Prospect News that word that the San Jose, Calif.-based power company would be doing the financing created a nice amount of positive sentiment in various markets and triggering a "fair amount of activity" on the bank debt side because of swaps.

"The bond market is reacting positively because [Calpine] can come to market with any new securities and, it's being well received. The convert is a little bigger in size then expected so that was a nice surprise. [Also] It helps liquidity. [Plus] now that news is out, there are no more surprises. People are relieved that they're doing what they said they were going to do."

Calpine's second-lien bank debt was quoted at 87 bid, 87.5 offered by one trader, while a second trader quoted it a bit more conservatively at 85.75 bid, 87 offered.

Calpine's bonds were meanwhile also better on the news, with a market source quoting its 7 5/8% notes due 2006 at 93 bid, and its 8 5/8% notes due 2010 at 66, both half a point better, while Calpine's 7 7/8% notes due 2008 gained a point to 69.

At another desk, Calpine's 8¾% notes due 2007 were seen up better than two points, at 81.5.

Calpine on Thursday announced that it would sell some $600 million of new unsecured convertible notes due 2014 via sole bookrunner Deutsche Bank Securities Inc. and approximately $785 million of first-priority senior secured notes due 2014 via Merrill Lynch. Both deals are expected to price Monday.

Proceeds from the convertibles will be used to redeem the company's High Tides I and High Tides II securities and to redeem or repurchase other existing indebtedness through open-market purchases. Net proceeds from the bond offering are also expected to be used to redeem or repurchase existing indebtedness through open-market purchases.

Concurrent with the offerings, Calpine will use cash on-hand to repurchase approximately $266 million principal amount of its existing 4 ¾% unsecured convertible notes due 2023 from Deutsche

Bank, and call the remaining $198.5 million principal amount of its 5¾% High Tides I and the remaining $285 million principal amount of its 5½% High Tides II.

Calpine deals seen as net debt

But while some argued that the Calpine deals were positive in that they lifted the cloud of uncertainty over the independent power producer's liquidity standing, others countered that it was a net debt increase so there was nothing to suddenly trigger enthusiasm about holding Calpine paper.

A convertibles sellside market source at a boutique in New York said the sum of the Calpine transactions appear to be an addition to net debt rather than a debt reduction exercise.

The Calpine 4.75% convertible notes were hit a little bit, he pointed out, so that probably suggests there is some refinancing risk even though the company is buying back a chunk of that issue from Deutsche Bank.

"I take this flurry of refinancing activity as a signal that third quarter will be an even bigger disappointment, at least in terms of a shortfall from Street expectations," said a convertibles buyside market source.

"As S&P says, the inability of FFO [funds from operations] to cover interest expense is not only made worse by disappointing operating results, but by the additions to interest expense from the High Tides, accelerated amortization of financing costs, potential project cancellations, a number of things. All of these are piling on at a bad time."

S&P said Calpine's adjusted funds from operations interest coverage was low at 0.7 times on a 12-month rolling period ending June 30, and the rating agency expects that over the next five years it will hover near the 1.0 times area.

"I would be surprised if much of the liquidity recently raised through sales can be used for debt reduction rather than meeting due bills. I don't see a significant net debt reduction as some here have suggested."

Interstate loans firm

Elsewhere, activity calmed down a bit in Interstate Bakeries Corp.'s bank debt, but levels hung in there quite nicely and even felt " a touch better" with the revolver quoted at 97 bid, 98 offered and the term loans quoted at 95 bid, 96 offered, according to a trader.

On Wednesday, following news of its Chapter 11 filing, Interstate's revolver traded around 97 and term loan traded around 95 - a 11/2-point improvement on both tranches - with activity in the name seen strong.

The wholesale baker and distributor of fresh baked bread and sweet goods - known for brands such as Wonder Bread, Hostess, Dolly Madison and Drake's - filed for bankruptcy protection in the U.S. Bankruptcy Court for the Western District of Missouri in Kansas City, mainly because of liquidity issues resulting from declining sales, a high fixed-cost structure, excess industry capacity, rising employee healthcare and pension costs, and higher costs for ingredients and energy, according to a company news release.

Observers said that its sales were especially hurt by a diet and health craze among many chunky people who have lately eschewed such yummy long-time favorites as Hostess Twinkies and Drake's Devil Dogs in favor of low-carbohydrate eating regimens such as the Atkins Diet.

The company received interim court approval on Thursday permitting its $200 million debtor-in-possession financing facility from JPMorgan Chase Bank, and permitting it immediate access up to $50 million to continue operations, pay employees, and purchase goods and services going forward during the restructuring period, according to a company news release.

Intermet down again

Back among the bond investors, Intermet Corp.'s bonds were once again lower, the fourth straight day on the downside for the Troy, Mich.-based automotive steering and suspension assembly maker's 9¾% notes due 2009.

Those bonds had skidded out of control on Monday, falling some 30 points into the mid-40s, after the company projected a quarterly loss of between $19 million and $24 million and said that the loss would put it in violation of its credit facility financial covenants.

After that, the bonds continued to erode, reaching the upper 30s during Wednesday's session. In Thursday's dealings, they were lower still, a trader quoting them as having fallen to 34 bid, 36 offered.

Other automotive names were likewise affected, both on sector sympathy with Intermet and on the realization by investors that the production downturn by Detroit's Big Three and their foreign rivals, including the latter's U.S.-based "transplant" operations - would spell bad news for the supplier companies. But the other companies steadied on Thursday.

Among those getting hit have been Oxford Automotive, quoted on Thursday "not much moved," a trader said, at a wide 38 bid, 45 offered, and J.L. French Automotive Casting, whose bonds steadied after having fallen Wednesday to 75 bid.

American Airlines lower

In the troubled airline sector, a trader quoted American Airlines bonds as trading in the mid 60s, well down from recent levels in the 70s, although it was his perception that those bonds had gradually declined over several sessions and were not necessarily lower on the latest news. AMR Corp., the Fort Worth, Tex.-based parent of the leading U.S. carrier, said on Wednesday that the airline's August revenue was weaker than expected after hurricanes and high fuel prices cut into results, and further said that it expected its mainline unit revenue to drop in the third quarter by 2.5% to 3.5% versus year-ago levels.

AMR also warned that it might not be able to remain in compliance with one of its bank credit facility covenants, and said it was in active discussions with its lenders on refinancing the facility.

Other traders, however, saw little in the way of trading in AMR.

One said that he had seen Delta Air Lines Inc.'s bonds easier, with the Atlanta-based carrier's 8.30% notes due 2029 a point off at 24.5, while its 10% notes due 2008 were about 1 ½ points lower, at 33.5.

However there was activity in the convertibles market.

Delta's two convertibles dropped another 1 to 1.25 points, traders said, while the stock plunged another 13 cents, or 3.5%, to $3.57.

Delta announced the sale of airplanes and spare engines to FedEx, and coming after a vendor had refused to cater food and drink on its flights without upfront cash payment, the news sent its bonds lower again.

AMR Corp.'s warning about American Airlines Inc. also impacted Delta, traders said.

Credit analysts suggested the markets are reacting to the sparse showing of restructuring details from Delta so far, including the lack of any wage concession agreement with its union pilots.

Moreover, CreditSights analysts Roger King and Glenn Reynolds said in a report Thursday that Delta management has yet to provide investors with a complete restructuring plan and steps taken thus far will not prevent a bankruptcy.

"As market forces continue to ratchet down on Delta, the suspense is killing," the analysts said in the report.

"Delta's reengineering plan announcement was long on style but short on substance. There has been little follow-up...The plan was months in the works, so there must be something there. Three data points have emerged so far. Management is either playing a tight game with short, little jabs, or has yet to draft an overall solution."

AMR's warning in a late-day Securities and Exchange Commission filing Wednesday sparked more downgrades to the stock and the credit reacted accordingly, convertible traders said.

"The credit is blowing up," a sellside trader said, referring to AMR. "A lot of the blame is on oil prices, but business in the air is just bad all the way around. Everyone is afraid that American will end up right back where they were a year ago, almost literally at the doors of the bankruptcy court."

AMR's two convertibles dropped 2.5 to 3 points each, he said, with the 4.25s at about 71 bid and the 4.5s at 66 bid. AMR shares plunged 68 cents, or 7.78%, to $8.06.

(Ronda Fears contributed to this report)

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