Calpine continues slide after Moody's warning; Echostar announces deal, up on Vivendi news

By Paul Deckelman and Paul A. Harris

New York, Dec. 14 - After a one-day respite Thursday during which troubled telecommunications-linked bonds such as Global Crossing Holdings Ltd. and Lucent Technologies Inc. had temporarily taken center stage, the battered energy-producing sector was once again where the action was in an otherwise generally sedate high yield secondary market Friday, as Calpine Corp. debt continued to head south after a threatened ratings downgrade - which became fact late in the day.

In the primary, a raft of deals - six and possibly seven - priced Friday but a number of sell-side observers told Prospect News they saw the market "backing up."

And even though at six deals Friday matched the busiest session of any day since the high yield primary reopened after the Sept. 11 terrorist attacks, perhaps the biggest news was carried over from Thursday.

EchoStar Communications Corp., which had been expected to announce an offering Thursday, finally emerged with business, word of which had circulated for a full week around the primary. However the deal was not the colossal $2.5 billion that at least one source had seen coming, nor even the certainly formidable $1 billion that numerous market watchers anticipated.

Nevertheless, the $700 million of senior notes that are expected to price Wednesday or Thursday via joint bookrunners Deutsche Banc Alex. Brown and Credit Suisse First Boston and lead managers Lehman Brothers and UBS Warburg represents the largest new deal of the post-Sept. 11 primary.

One informed source, asked why EchoStar emerged at a less-than-anticipated amount, commented that given the correct circumstances EchoStar could easily be upsized.

"Just look what's happened this week," the source said. "Pegasus is nowhere, Appleton prices wide, (United Surgical Partners) priced wide.

"If you just look at all the deals pricing wide you get a sense that investors are getting a little full-up on supply.

"I think if you look at the volume this week versus whatever's priced so far since Sept. 11, this is the biggest week."

During the week, $2.925 billion of deals priced (not counting Pegasus Communications), according to information compiled by Prospect News, more than any week since Sept. 11, the second-biggest week being the one before when $2.124 billion came to market.

Indeed, beginning Wednesday afternoon, sell-siders began telling Prospect News that the high yield primary market was backing up, backing off, and otherwise conforming to bleak news trailing out of the equity markets and the U.S. and global economies at large.

Nowhere was this "back-off" effect so directly felt, perhaps, than in another satellite TV company's deal, Pegasus Satellite Communications, Inc.'s $175 million offering, initially expected to price Thursday via bookrunner CIBC World Markets with Bear Stearns & Co. as joint lead manager and Lehman Brothers and Fleet Securities as syndicate members.

News went across the market Thursday that Pegasus had been downsized from the $250 million originally discussed and that talk on the deal had widened to a yield of 12% to 12¼% with an 11¼% coupon, out from the originally announced 11¼% area talk.

Early Friday afternoon, Pegasus announced it had priced the deal due 2010 in a private placement with an annual interest rate on the senior notes of 11¼% although it did not disclose the yield. It added that the notes would only be offered to institutional buyers under Rule 144A.

No terms on the deal were circulating in the market.

By the middle of Friday afternoon one informed source told Prospect News that "the underwriters bought Pegasus."

"They had a backstopped transaction," the source said. "And it looks like they took the whole offering down. They didn't sell it."

A spokesman for Pegasus Communications declined to comment on the status of the transaction, and referred Prospect News to the company's press release. As far as the underwriters identified by the source as having bought the transaction were concerned, a spokesman for CIBC World Markets said that officials who could comment had left for the weekend and would be unavailable until Monday while a call to a Lehman Brothers spokesman seeking comment went unreturned.

In business conventionally executed Friday, a total of six deals priced for $1 billion. These included:

--Ainsworth Lumber Co., Ltd. sold $95 million of 5.5-year notes to yield 14%;

--The Great Atlantic & Pacific Tea Co., Inc. sold $275 million of ten-year notes to yield 9 1/8% in an offering upsized by $50 million;

--Gray Communications Systems, Inc. sold $180 million of 10-year notes to yield 9 3/8%;

--IPC Acquisition Corp. priced $150 million of eight-year notes to yield 11½%;

--Unisys Corp. sold $150 million of three-year notes to yield 8%; and

--United Surgical Partners, Inc. brought $150 million of 10-year notes to yield 10 1/8%.

Catching his breath, one official from the Gray Communications syndicate commented early Friday that perhaps the high volume of business that came during the week of Dec. 10 had pushed the buy-side to the saturation point.

"The market feels a little heavy right now," the official said. "We could feel that when we were out there trying to get Gray done. You had about 50% more paper this week than you did last week. You've got all these drive-bys. I just think you've got a lot of people trying to do a lot of work on real short notice, and people are getting kind of tired coming into the end of the year.

"People aren't getting a lot of time to look at deals. They're having to scramble around and pull their stuff together really quickly."

Asked whether the number of deals that widened prior to or during pricing indicated that the sell-side was being aggressive on price talk, the official suggested that a hot high-yield primary market was merely coming back into balance.

"Deals are probably trying to get priced a little more aggressively," the official conceded. "For a little while you saw some deals that were coming through where their bonds were marked.

"What you're probably seeing is things coming more back into equilibrium. And as people have seen that they have probably been a little more aggressive on where they tried to bring deals."

In addition to EchoStar, one other new deal, a drive-by, surfaced Friday. Canadian soft drink manufacturer and bottler Cott Beverages, Inc. expects to price $275 million of 10-year notes via Lehman Brothers on Monday afternoon. Price talk on the new Cott notes is for a yield in the 8% area.

In the secondary sphere, Calpine once again was the most closely watched credit, especially after a late-Thursday warning by Moody's Investors Service that it might cut the rating on the San Jose, Calif.-based power generating and energy trading company's bonds to junk-bond status from their current precariously investment-grade BBB- level. With Standard & Poor's currently affirming the bonds at BB+, Calpine remains split-rated by the narrowest of margins; loss of its last vestige of investment-grade respectability might force some portfolios to dump their holdings, a possibility that became a reality late Friday when Moody's dropped Calpine backed to junk, reversing its October upgrade.

A trader saw Calpine's bonds "bouncing around within a five-point range" - a volatility which he said was "expected" following the Moody's announcement - released after the market close Thursday - that it was putting Calpine's ratings under review for a possible downgrade. The ratings agency cited its concerns about the company's "liquidity, modest near-term cash flow and financial flexibility."

The trader saw its 8½% notes due 2011, which had finished bid in the 79-80 area Thursday, opening Friday around 75 bid/77 offered. Throughout the morning, the bonds traded in "a wide range" of between 73 and 78, before activity "just died out."

Calpine's shares - which have been falling right along with its bonds of late - lost $2.85 (17.76%) on Friday, to close at $13.20 on the New York Stock Exchange. Volume of 37.6 million shares was more than four times the usual 8 million-share turnover.

Calpine's troubles - largely the result of the guilt-by-association reaction the market seems to have taken toward the whole electricity-generating and energy-trading sphere in the wake of Enron Corp.'s collapse - were mirrored in the trading of another power plant operator and energy trading firm, AES Corp.

A market-watcher saw the Arlington, Va.-based company's bonds down about three points across the board Friday, with its 8 7/8% notes dipping to 82 bid and its 9½% notes due 2009 falling back to 85. Its 9 3/8% notes due 2010 were at 83.25.

Meantime, the bonds of Enron itself were heard to have lost about a point across the board, with its senior notes easing to 18 bid.

Apart from the energy generating and trading complex, a trader said telecom issues, which had led the way downward on Thursday, retreated into the background Friday but still "remained under a little bit of pressure."

He saw Williams Communications Group Inc.'s 10 7/8% notes due 2009 having opened the day's dealings in the 45.5 bid/47.5 offered level, before backpedaling to about 44 bid/45 offered, although he acknowledged that there was "not much trading" seen in the Tulsa, Okla.-based long-haul telecom network operator's bonds. Nextel Communications Inc.'s paper, such as its 9 3/8% senior notes due 2009, opened around 78.5 bid/79.5 offered before coming down about a point.

Global Crossing, the "star" of Thursday's sector retreat, when its bonds moved as low as six cents on the dollar from prior levels in the teens, before ending quoted bid around 8 or 9, was heard hanging in around that same 7-9 bid range, "with nothing to say there right now," the trader said.

He noted that "we saw a little increase" in trading levels for Echostar, following the news that European media giant Vivendi will buy a 10% stake in the Littleton, Colo.-based satellite television broadcaster for $1.5 billion.

Echostar DBS Corp.'s 9 3/8% notes due 2009 gained a point to 103.25, while its Echostar Broadband 10 3/8% bonds closed up a point at 105.25.

On the new-deal front, the new United Surgical Partners 10-year bonds, after having priced around 99.25, were heard to have been offered in the Street at 100.25, although with no bids seen. A trader saw "the lead (manager) put a 99.25 bid in there, but no one moved, no one looked at it, no one took it up. So that was kind of a dead issue, if you ask me. It was not a winner, if you were looking to flip it (i.e., quickly sell a new bonds off at a higher price), as some of these guys were."

But despite the activity here and there in names such as Calpine, traders said that overall, secondary activity Friday was slow, the market beginning to settle into its year-ending pattern.

"It was pretty much a non-event day," one said, "a lot of nothing."

Another trader said things were "dead, with volume next to nothing. Anything that's up or down, I would attribute it to lack of participation." He said he hadn't seen anything "moving all over the place," with the exception of the Calpine paper.

Market players noted that total high yield mutual fund inflows for the week ended Wednesday were just $1 million - a far cry from the hefty inflows which had been seen over the prior eight weeks, as market liquidity levels recovered from the nosedive which they took in the weeks immediately following the Sept. 11 terrorist attacks.

In the first five weeks following the attacks, almost $1.6 billion more flowed out of the junk funds than came into them, according to market participants who track the weekly fund flow statistics released by AMG Data Services Inc., which are seen as a reliable gauge of overall market liquidity trends. Then, the tide turned, in October and over the next eight weeks net inflows totaled $2.852 billion, including $280.3 million in the week ended Dec. 5.

Commenting on the steep drop-off in the fund inflows in the most recent week, a trader said investors "are running out of things to put the money into. There's not a lot of new issues coming to market, and it's just that time of the year."

End

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