Quebecor drops out; Countrywide falls on liquidity worries; Calpine retreats on valuation cut

By Paul Deckelman and Paul A. Harris

New York, Nov. 20 - Quebecor World Inc. on Tuesday became the latest in a lengthening list of prospective high yield issuers deciding to shelve doing their deals, at least for now, due to unsettled credit market conditions; it thus joins such borrowers as Alltel, Apria Healthcare Group Inc. and DTE Energy Co., all of whom were heard by high yield syndicate sources to have put off their upcoming deals for pretty much the same reason just within the past week.

In the secondary arena, Countrywide Financial Corp.'s bonds - nominally either investment grade or split-rated but trading like distressed junk bonds - tumbled, along with its stock shares, and its debt-protection costs widened out amid new market concerns about the Calabasas, Calif.-based mortgage giant's liquidity. Company executives denied any liquidity crunch and attacked bankruptcy speculation as "absolutely untrue."

Calpine Corp. bonds were lower in active trading, after the bankrupt San Jose, Calif.-based electric power producer announced that it had reduced its valuation of the company by 4.7%, or some $950 million, ahead of the scheduled Nov. 30 vote on its plan of reorganization by its junk bond holders and other creditors.

High yield syndicate officials were marking the broad market lower throughout the Tuesday session, as well as at the close.

One official said that junk bond yields are presently at the highest - and spreads at the widest - levels seen since November 2003.

The source added that the broad market index on Tuesday had a spread of 570 basis points and yielded 9.34%.

A credit quality breakdown sees double-B paper now trading at a 450 basis points spread to Treasuries, while the spread of single-B paper is at 520 basis points, and triple-C is at 800 basis points, the source added.

Quebecor postpones

The only news to emanate from Tuesday's primary market was negative.

Quebecor World cited adverse market conditions as it postponed its downsized, restructured $300 million offering of seven-year senior unsecured notes (Caa1/B) on Tuesday.

The proposed issue was cut from $400 million on Monday. Meanwhile in a restructuring, call protection was extended for the life of the bond, from initial call protection of four years.

Citigroup was the left bookrunner. Banc of America Securities LLC, BNP Paribas and JPMorgan are joint bookrunners.

The company also withdrew a $250 million equity offering and a $100 million offering of convertibles.

Proceeds from the notes and convertibles, and a portion of the proceeds from the equity offering, were to have been used to repay the company's bank debt, to redeem its series 5 cumulative redeemable first preferred shares for a redemption price of C$175 million plus accrued and unpaid dividends.

A sell-side source, not in the Quebecor deal, told Prospect News that the Montreal-based marketing and advertising company is not expected to stay away for long.

"Quebecor needs the money but right now it's too expensive," the source said.

On Monday the bonds were talked with an 11½% coupon to yield in the 12½% area.

Beyond Thanksgiving

Several sources who have spoken to Prospect News since late last week have suggested that given the present market sentiment there is apt to be very little if any primary market business in the run up to 2008.

There are just as many market watchers, however, who believe that such a scenario is unlikely.

On Tuesday one high yield syndicate official said that the market will no doubt be open to issuers from certain sectors - particularly to issuers from the oil and gas exploration and production sector.

What's more, the source added, such issuers will more than likely appear with drive-by deals. And their bonds will likely be printed with comparatively favorable yields.

Having so specified, however, this source also professed knowledge of high yield accounts that have lately become focused on the bank loan market.

In particular the source pointed to the Alltel loan, which priced recently at 96.00.

The official said that with three years of call protection the loan is structured much like a bond.

What's more, the source said, investors expect the loan to be called at par, which would represent a significant premium to the discount issue price.

And the loan has first-lien collateral, the banker pointed out.

"So even if the accounts have money to put to work it doesn't necessarily mean they will put it to work in high yield bonds," the official said.

When Prospect News asked this official whether or not December will see the approximately $9 billion of issuance needed in order for the 2007 primary market to top 2006's all-time issuance record of $156.6 billion, the banker replied that at this point such a scenario is unlikely, "unless something drastic happens."

Indexes point lower

Traders saw a generally heavy market on the last full session of the week ahead of the very long Thanksgiving holiday break, which will see an abbreviated session on Wednesday, a full market close on Thursday, and what is expected to be an extremely dull, quiet and very lightly attended" half session on Friday, when most Americans, presumably including many Wall Streeters, are expected to be still at home, recovering from the after-effects of Thursday's feasting, or hitting the stores for the "Black Friday" sales that kick off the official start to the holiday shopping season.

"It seemed like pretty much everything was down," a trader said, noting for instance that such widely varied bonds as Tenet Healthcare Corp.'s 9 7/8% notes due 2014, Blockbuster Inc.'s 9% notes due 2012 and KB Home's 6¼% notes due 2015 were all down 1 point at 89 bid, 90 offered for Tenet, 84.25 bid, 85.25 offered for Blockbuster and 86 bid, 87 offered for KB.

Another trader saw the widely followed CDX index of junk market performance down 5/16 at 93 11/16 bid, 93 15/16 offered. Among other market barometers, the KDP High Yield Daily Index fell 0.16 to 77.26, while its yield widened 4 basis points to 8.69%. Overall, declining issues surpassed advancers by a better than three-to-two margin. Market volume was up about 23% from Monday's depressed levels.

Countrywide clobbered on liquidity concerns

Countrywide Financial's bonds and shares fell and its credit-default swaps widened dramatically - a sign of eroding investor confidence in the big mortgage company's viability - amid renewed market concerns about possible liquidity problems, which forced company officials to take the step of denying market rumors that it might be forced into a bankruptcy filing - speculation which Countrywide called "absolutely false."

Countrywide's 6¼% notes due 2016 - nominally split-rated at Ba2/BBB/BBB - were seen having fallen as low as 61 bid from the prior session's close at 65, before finally stabilizing in the 62 area, in busy trading. Its 5.8% notes due 2012, meanwhile - technically considered high-grade at Baa3/BBB+/BBB+ - opened below their Monday close of 72, and actually fell below 70 for a time, although they managed to push higher near Tuesday's close with the help of several large trades which lifted the bonds back to around the mid-70s. The similarly-rated 3¼% notes due 2008, one of the most busily traded issues of the day, were seen having gyrated wildly within a 10-point swing between the mid-80s and the mid-90s before finally coming to rest down 2 points on the day at 88.

A junk trader said ironically that at his shop, the "investment-grade/crossover guys had a lot of fun today with Countrywide. Rumors abounded, and we heard the 'B' word thrown around a couple of times." He said that the debt "was all over the place. It gapped wider [on spreads] again. We flashed back to the summer for those levels." Despite its nominally high grade ratings, Countrywide's bonds, he said, are now being quoted on a dollar-price basis just like common junk bonds.

He added that while he had seen that "some investment-grade hands are still in them, most companies buying are high-yield type accounts," or at least are a mixture of junk and high-grade customers, with "investment-grade/crossover accounts on the sell side."

At another shop, a trader said that Countrywide's bonds "got smoked," citing rumors that the company would file for bankruptcy Tuesday. But while the company later denied that they had any intention to file, one trader was not necessarily buying their story.

"We kind of chuckle whenever we hear 'absolutely no intent'," he said. "Nobody intends to file bankruptcy."

He added that "I would imagine their next set of numbers will show a tremendous amount of defaults."

The trader said Countrywide's 4¼% notes coming due next month - which would normally be bid at or above par on expectations that they are money-good and will certainly be redeemed - were offered at 98, "all you want."

Countrywide CDS passes 1000

While the bonds were going down, the price investors would have to pay to hedge against a possible default on those bonds was meantime skyrocketing, with one trader seeing those CDS contracts balloon out by 500 basis points in the course of just one session to 1,250 bps from an already-bloated 750 bps previously. He said that besides the widening out, the stock was tumbling, put-option volume, seen as a bearish bet against the company's shares, was "spiking." He said that the "usual set of rumors and innuendo is circulating. Short spreads and short tails are going bananas!"

Market buzz that the company might be having liquidity problems drove its New York Stock Exchange-traded shares down 22% at one point in the session. Those shares eventually recovered a lot of their early losses to end down 29 cents (2.74%) at $10.28. Volume of 152 million shares was nearly four times the usual turnover.

Freddie troubles hurt sentiment

Countrywide got clobbered after government-sponsored mortgage financier Freddie Mac reported that it lost $2 billion in the third quarter, and said it reserved $1.2 billion for bad loans. Analysts predicted that those losses and the slowdown in the housing market could severely limit Freddie Mac's ability to purchase pools of mortgages from lenders such as Countrywide, which generate capital to keep making new loans by securitizing massive bundles of loans they have written and selling them, either to private-sector investment banks or to government-sponsored enterprises such as Freddie Mac and its larger companion, Fannie Mae. While investment banks have recently been pulling in their horns as far as buying loans from the mortgage lenders, the GSEs had seemed like reliable financing sources of last resort - until Tuesday's Freddie Mac results led to market fears that this funding source too could dry up.

With rumors flying around that troubled mortgage lenders like Countrywide might find their liquidity cut off and be forced into Chapter 11, company executives counter-attacked in the media, declaring that such talk was "absolutely untrue."

Later, Countrywide issued a statement - which presumably helped its battered shares bounce back from their early lows - in which it said that it continues to believe that it has ample liquidity and capital and will be a beneficiary of ongoing mortgage market consolidation. The statement said that it had $35.4 billion in highly reliable liquidity available as of Oct. 31, up from $33.6 billion available at the end of September. It said that Countrywide Bank, its primary operating entity, "has sufficient liquidity available to meet its projected operating and growth needs and has accumulated significant contingent liquidity in response to evolving market conditions."

The company further insisted that Countrywide Home Loans "is expected to service debt maturities beyond 2008 without additional debt issuance," said that it has "excess regulatory and credit-rating agency capital," and touted the fact that Moody's Investors Services on Monday confirmed Countrywide's investment grade credit ratings, while it still enjoys investment grade ratings on most of its debt from Standard & Poor's and Fitch Ratings.

Calpine eases on lower valuation

A trader saw Calpine's widely traded 8½% notes due 2008 issued by the company's Calpine Canada Energy Finance ULC subsidiary 1 point lower at 102.5 bid, 103.5 offered, while Calpine's 10% notes due 2014 were 1½ points down at 60 bid, 62 offered. He saw the 8 3/8% notes due 2014 down ½ point at 96 bid, 97 offered.

A market source saw the Calpine Canada 81/2s fall from Monday's closing levels around 104.5 to about 102.5 at the opening Tuesday, and then nose even lower than that, at one point bottoming around 101, before coming off that low to stabilize in the mid-102s and go out at 102.5.

It was pretty much the same story for the parent company's own 8½% notes, which are due 2011. They had closed Monday a little below 104, fell as low as 101 in heavy size trading on Tuesday and then stabilized in the 102s, spending most of the session there before blipping up to a closing level around 103, down not quite a point.

However, another market source saw Calpine's 8¾% notes due 2007 swoon 5 points to the 102 level, with the 2011 81/2s seen down nearly 2 points at 102 .

Calpine's over-the-counter-traded penny stock shares nosedived to about 49 cents on the news, losing nearly half of what little remaining value they had on heavy volume of some 45 million shares, more than seven times the norm. That level is down from Monday's close at 92 cents, and is well down from the stock's 52-week high point of $4.15; given Calpine's widely reported troubles of the past few years, it's almost unbelievable that its stock was trading at almost $60 per share back when the company was riding high in mid-2001.

According to a market source, the company's new valuation implies an equity recovery of around 41 cents at best - and maybe even as little as zero, well down from the estimated $1.94 per share recovery the shareholders might have gotten under the previous, higher valuation. The source said that the new valuation would, of course, be a negative for the equity holders but would still be a positive for unsecured creditors, including the holders of most of Calpine's bonds, since they would either be made whole or would at least enjoy a substantial recovery of their claims in any event, and he predicted that the creditors would likely approve the reorganization scheme.

Calpine, which slid into bankruptcy in late 2005, reduced its valuation by roughly $900 million, from the $20.25 billion it had announced back in June, to a mid-range enterprise value of $19.3 billion - halfway between the low estimate of $18.3 billion and the high estimate of $20.4 billion, according to the investment bank Miller Buckfire & Co. LLC, which has been working with Calpine on its restructuring. It said the lower valuation was due to the lower value of other companies in that same industry and greater market volatility.

Calpine, in its announcement, broadly outlined its various recovery scenarios using the new mid-point valuation figure, based on the number and value of allowed claims against the bankruptcy estate, which will depend on the outcome of current litigation between Calpine and some creditors. Under its so-called "low-claims" projection, general unsecured creditors, including the bondholders, would be paid in full on their allowed principal plus their pre- and post-petition interest claims while shareholders would recover 41 cents per share; however, under an alternative "high claims" projection, the unsecured creditors would recover 99.7% of their allowed principal plus pre-petition interest claims, but no post-petition interest claims - collectively the equivalent of 88% of their total claims of allowed principal plus pre- and post petition interest. Shareholders, meantime, would get nothing under that scenario.

Calpine also released a mid-range scenario, predicated on the number and value of the claims coming at the middle of the range between the "high claims" and "low claims" extremes; under that projection, the unsecured creditors would recover 96.7% of their allowed principal plus pre- and post-petition interest claims but the shareholders would still receive nothing.

Echostar steady though deal talk cools a bit

Echostar DBS Corp.'s bonds were seen hanging onto most of the gains which they had notched on Monday, when the bonds, along with the company's stock, pushed higher on media speculation that the Littleton, Colo.-based satellite broadcast operator might be on telecommunication giant AT&T Corp.'s shopping list, with some accounts predicting that a buyout deal paying DISH shareholders somewhere in the mid-$60s for each share could be announced soon.

On Tuesday, that speculation seemed to cool a little bit; for instance, The Wall Street Journal's on-line Deal Journal blog reported that despite Monday's enthusiastic market speculation, "no deal between AT&T and EchoStar is imminent, people familiar with the matter tell us. One person close to AT&T says the two sides aren't even talking about an M&A deal at the moment. What is more, it still isn't clear that any bankers have been hired to arrange the long-anticipated deal or that AT&T has decided to go after EchoStar and not DirecTV."

The report, while admitting that such conditions "can always change at a moment's notice," added that "from what we can divine so far, enthusiasts of an EchoStar acquisition may not feel much gratitude this Thanksgiving."

While that dash of cold water, as well as plain old profit-taking, caused Echostar's Nasdaq-traded shares, which had jumped almost 20% on Monday, to drop back almost 9% on Tuesday, the bondholders seemed to be keeping the faith. The company's 7 1/8% notes due 2016, which had traded most of Monday in a 103-104 context before closing several points below that on a small late trade, returned to that 104ish area Tuesday and stayed there in size trading.

Its 7% notes due 2013 also hung in around 104, while its 5 3/8% notes due 2008 were essentially unchanged around par bid.

Stephanie. N. Rotondo contributed to this report

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