Calpine bonds tumble on worries about Enron similarities; Hollywood up on funding plans

By Paul Deckelman and Paul A. Harris

New York, Dec. 10 - Calpine Corp. bonds and shares were being quoted noticeably lower Monday, on investor fears that the power generating company might follow in the footsteps of the failed Enron Corp. On the upside, Hollywood Entertainment Corp. debt was solidly higher as the video-rental company announced new financing plans.

Meanwhile the primary market continued its recent busy pace.

A couple of drive-by deals appeared Monday morning, pushing to 13 the number of deals on the primary-market forward calendar for the week of Dec. 10. However, by the session's conclusion only a dozen of those deals remained.

Terex Corp. surfaced with $200 million of 10-year notes Monday morning and had priced them by the evening to yield 9¼%. Bookrunner was Credit Suisse First Boston. Price talk was for a yield in the 9¼% area.

Also emerging early Monday was a deal for Pegasus Satellite Communications, Inc. The company is planning $250 million of notes due Jan. 15, 2010 (B3/CCC+) via bookrunner CIBC World Markets. The offering is set to price late Wednesday or early Thursday, sources told Prospect News.

News also surfaced Monday that owing to its borderland ratings of Baa3/BBB-, both with negative watches tagged on, Avista Corp.'s new offering of $150 million first mortgage bonds would be marketed to both high yield and investment grade accounts. The deal, via bookrunner Goldman Sachs & Co., is set to price Wednesday.

The wildfire rumor that circulated through Monday's high yield primary market was that Echostar Commications Corp. would shortly bring a $1 billion deal.

Several syndicate officials said they had heard talk of a deal from the satellite company but had no confirmation that it was actually happening and no further details, including names of the possible underwriters or timing. Late in the day Monday, Echostar could not be reached for comment.

One sell-side source commented to Prospect News that what is surprising, given the present circumstances prevailing in the high yield primary, is that we have not seen more deals of that size as 2001 winds down.

"Last week seemed like a really busy week, but it really wasn't," the source said. "There was less than $2.4 billion done. That's not a lot, if you look at how much cash keeps flowing in.

"You're getting 10% of that market demand every week just in new cash flowing into high yield mutual funds. That's not even counting new money flowing into CDOs, and other parts of the demand curve needing to invest their funds. And that's not even counting coupons.

"So if you look at it, I think there is some serious cash on the buy-side right now. And I think we're starting to see that in the makeup of deals. You had Horizon PCS, a mid-'CCC' deal that's pretty aggressive pricing below 14%. The market is definitely healthy right now.

"That could immediately be taken out of the market, however, if you get a January that's like January 2001 where you have big issuers that decide to do drive-bys," the source warned. "There are companies out there that can do $500 million, $1 billion, $1½ billion. And they'll do it in the snap of a finger.

"That's what I'm most surprised about, that we haven't seen more of that. The drive-bys we are seeing are smaller and not from the type of issuer that I would have expected. And maybe that's indicative of the fact that they loaded up in the middle of the year when they thought it could be their last shot and they blew it."

Also on Monday price talk emerged on Wheeling Island Gaming, putting the yield at 10%-10 ¼%, and Collins & Aikman, at 10¾%-11%.

Price talk also emerged on Appleton Papers Inc. $250 million note offering, with guidance at 10 7/8%-11 1/8%. Although the issue was said to be headed for a Monday pricing, late in the session terms had not emerged, according to a syndicate source.

Back in the secondary, Calpine bonds were heard down anywhere from 10 to as much as 15 points on the session - its 8.625% notes due 2010 and 8½% notes due 2011 swooned to around the 81 mark from prior levels in the low-to-mid-90s - after investors already shell-shocked by the recent descent into near-oblivion of Enron's formerly investment-grade bonds feared for the value of their Calpine holdings. Such concerns were given new impetus by a weekend New York Times article which seemed to find more "similarities" than differences in the two energy companies - a notion which Calpine officials on Monday dismissed as

"ridiculous."

The Times article, ominously entitled "After Enron's Failure, Should Calpine Investors Worry?", drew an analogy between Calpine, a San Jose, Calif.-based power plant operator, and Enron, a Houston-based pipeline and energy trading company, on the grounds that Calpine is in some ways, "looking more like Enron by the day. Its status as a high-growth company, generating the 30 percent annual earnings growth that Wall Street expects, looks increasingly doubtful, and it, too, has financial statements that are, at times, opaque."

The Times article did point out that there are significant differences between the two companies - a point which Calpine's executives have been stressing ever since Enron got into trouble. They put out a statement characterizing the Time article as "inaccurate" and "misleading," and stressed the point once again on a conference call late Monday, during which chief executive Peter Cartwright, in answering a Times implication that Calpine had patterned itself after Enron in some ways reiterated that "we never worked to emulate their business model."

Calpine equity investors were just as spooked by the Times speculation as its bondholders were; Calpine shares dropped as low as $15.85 in intra-day dealings on the New York Stock Exchange, two-year low, before going home at $17.79, down $3.58 (16.75%) on the day. Volume of 38.4 million shares was nearly eight times the normal turnover.

Calpine was not the only well-known high yield name to attempt to distance itself from the Enron debacle on Monday. Level 3 Communications Inc., in response to a recent news account about Enron which detailed the latter's business in buying and selling telecommunications bandwidth capacity, just as it did electricity, natural gas and other types of energy, said that Level 3 - which was mentioned in the story - "has never operated a bandwidth trading desk or engaged in bandwidth trading. As a vendor, Level 3 has sold private line, dark fiber and other communications services to Enron. Level 3 has never purchased communications services from Enron."

Level 3's benchmark 9 1/8% senior notes due 2008 firmed a point to 51.5 bid, although there was no indication that its Enron statement was much of a factor.

Meanwhile, Enron's own senior bonds were heard to have firmed a bit, quoted as high as 23 bid on the session, after having finished Friday in the 20-21 area. Its shares were up six cents, or 8%, to 81 bid on the NYSE.

The company, battered all last week by a crescendo of bad news, was reported by The Wall Street Journal to be the target of two separate bankruptcy court bids to take over its flagship trading operations. The WSJ said that Citigroup and UBS Warburg were working to finalize separate bids for the trading operations, which would be the first step toward a potential bankruptcy-court auction for the assets. The paper further noted that under one scenario being bandied about, Enron would be offered a minority stake in a new company, instead of a large cash payment.

AES Corp. Bonds "moved a lot," a market source said, quoting the Arlington, Va.-based international power generating operator's 9 3/8% notes due 2010 at 87 bid, down from 94, its 8 3/8% notes due 2007 at 79, down from 85,l and its 9 ½% notes due 2009 at 88, down from 94.

The losses came after the senior bonds of company's AES Drax Holdings Ltd. unit, which generates power in Britain, was downgraded to Ba1 from Baa3 by Moody's Investors Service, while its subordinated AES Drax Energy Ltd. notes were cut to B1 from Ba2. The AES Drax 11½% notes due 2010 had previously plummeted to around the mid-40s from the mid-80s, after Standard & Poor's recent warning that the BBB senior bonds could be dropped to junk levels. In response to the latest downgrade, they retreated at least two points to 43 bid.

Elsewhere, Hollywood Entertainment's bonds were quoted as having pushed as high as par bid/102 offered from prior levels around 92 bid/94 offered, after the Portland, Ore.-based video-rental chain announced that it had filed a shelf registration to offer up to $300 million of debt and $110 million of new shares, with an additional $16.5 million of stock available for over-allotments. It also said it had received a fully underwritten commitment from UBS Warburg LLC, good through March for a new bank credit facility. The facility would be conditioned upon the sale of at least $100 million of new stock, and the use of the sale proceeds, and those of the new facility, to repay all existing bank facility borrowings.

A trader noted that the over $400 million of prospective new security sales was just a bit shy of the amount which would be needed to "get rid of most of the company's paper" in explaining the reason for the bond rise.

Halliburton Co., whose investment-grade-rated bonds and shares had slid precipitously on Friday in response to a negative verdict in an asbestos-liability lawsuit, was heard by a trader to have rebounded a little from last week's sell-off. He quoted its 6% notes due 2006, which had fallen the equivalent of some 10 to 15 points Friday to an estimated level around 84-86 bid had "moved to the high 80s" Monday (price levels for the A1/A+ rated Halliburton are estimated, since the credit still officially trades on a spread-over Treasuries basis, like other high-grade debt, rather than on a dollar-price basis, the standard for junk bonds).

At the same time, the Dallas-based oilfield services company's shares were up $2 Monday, or 16.67%, to $14.

Halliburton said Monday that it expects to appeal a recent $30 million asbestos judgment imposed by a Baltimore jury, and predicted that even if its appeals do not succeed, it is confident that its insurance will pay most of any verdict amount.

That verdict, while not large in nominal terms for a multi-billion-dollar industrial concern, sparked investor concern Friday that it could be a harbinger of many other such verdicts; the threat of a flood of negative asbestos verdicts has forced a number of companies into seeking bankruptcy court protection, including building materials makers Owens-Corning, USG Corp. and Armstrong World Industries, chemical company W.R. Grace and auto-parts producer Federal-Mogul Corp.

Despite the company's confident-sounding statement, a junk trader scoffed that while Halliburton "is not ours yet, soon, we will get it. It will greatly widen out, and then it won't even be on spread anymore."

Another market observer agreed, noting that Halliburton "took it on the chin" after revelation of the Baltimore verdict, and has already widened out at least 300 to 350 basis points in having gone from the equivalent of trading at or near par to trading the equivalent of ten to 12 points lower. He quoted the 6% notes as trading at a spread equivalent to a price of 89 bid, down from par previously.

Noting the sudden negative sentiment about Halliburton (whose Dresser Industries subsidiary has been hit with a number of lawsuits) and unease among stock and bond investors about another investment-grade name, media giant Viacom (which inherited electrical products manufacturer Westinghouse's asbestos problems when it merged with CBS, which in turn has acquired Westinghouse), he said "investors are getting the vibes that anyone with even a little asbestos exposure could end up going down the tubes from all the lawsuits, just like the other five or six companies (Federal-Mogul, Owens Corning, et al). They're just staying away from anything with asbestos."

Perhaps the non-story of the day in the junk bond market was the news that National Steel Corp. is officially in talks to be acquired by U.S. Steel, as part of the latter's effort to consolidate the fractured American steel industry under its own banner.

While National's shares shot up 39 cents (24.84%) to $1.96 on the NYSE, on 14-times-normal volume of almost 700,000 shares, the Indiana-based steeler's bonds were little moved; its 9 7/8% notes due 2009 held steady at their recent 30 bid level. U.S. Steel's 10¾% notes due 2008, issued just a few months ago, were unchanged at 98. The 10 3/8% notes of bankrupt Bethlehem Steel, which has also been in talks with U.S. Steel, were little changed after having risen to above the 10-11 area from prior levels around 5-6.

End

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