Calpine debt gyrates after financing deal is pulled; Station Casinos prices offering

By Paul Deckelman and Paul A. Harris

New York, Feb. 24 - Calpine Corp. on Tuesday made official what some in the high yield market had figured for a while - that the San Jose, Calif.-based power generator was pulling the plug on its previously announced plans to sell some $1.3 billion of bank debt and a two-part, $1.05 billion offering of fixed- and floating-rate junk bonds. Calpine's existing debt was getting pushed around all over the place during the session, traders said.

Meanwhile the high yield primary market carried on the one-deal-a-day pace it set during Monday's session as Station Casinos Inc. completed the day's sole transaction, which came wide of price talk. It was the third casino operator in the past couple of days to lay down a bet that junk investors would still be interested in buying their sector's paper, even with the market backing up somewhat in other areas, as the Calpine deal proved. And still to come is yet another gaming credit - Pinnacle Entertainment Inc.'s planned offering of eight-year notes.

However a good deal of attention seemed focused on San Jose, Calif. energy producer Calpine Corp., which pulled the plug on its $1.05 billion two-tranche offering.

"Right now the sentiment has shifted a little bit, which is healthy to some extent, to weed out some of the triple-C names, and pave the way for some better credits coming to market," one sell-side source reflected on Tuesday.

"I think the market is healthy, but it's becoming a buyer's market. It's not like December and January, where everything you brought to market turned into a feeding frenzy."

Calpine bonds fail to electrify buyers

The doom-and-gloom scenario that market sources had been painting since late last week on the $1.05 billion bond portion of Calpine Generating Co., LLC's overall $2.3 billion financing package came to a head Tuesday when the company postponed the entire package.

Calpine cited "market conditions" as its reason for not going ahead.

The $1.05 billion bond portion of the financing (B-) was comprised of two $525 million tranches: a seven-year non-call-four fixed-rate tranche, which had been talked at a yield in the 11¼% area, and a seven-year non-call-four floating-rate tranche which had been talked at Libor plus 725 basis points.

Deutsche Bank Securities had the bookrunning mandate, although other investment banks were reportedly involved.

A market source told Prospect News that the fixed-rate bond tranche had been talked with a 10 7/8% coupon at a discount, to yield 11¼%, while the floater was talked at three-month Libor plus 725 basis points to price at 99.5 plus a 1.5% Libor floor

"It wasn't enough to get people interested," the source said. "Last week people seemed to feel that a new issue from CalGen would have to come about 150 basis points wide of the Calpine Corp. 8¾% due 2013, which at the time were trading with a yield to worst between 9½% to 9¾%. That left the impression that the bonds would come between 11% and 11¼%.

"One of the biggest obstacles seemed to be the amount of Calpine bonds already in the hands of high yield investors. Calpine came during the first half of 2003, capitalizing on the rash of utility refinancing deals at that time.

"Had Calpine come to the market a little earlier they would have gotten this done," the source concluded. "They had very bad timing."

Meanwhile, as the above-quoted market source took Calpine to task for its timing, another sell-sider said the company presently suffers significantly from overexposure in a light that does not altogether favor its debt side securities.

"A lot of people got hurt on Calpine debt during the past eight months," the source contended.

"And this wasn't a small deal. It's hard to place that amount of paper, particularly when the company had gotten used to taking advantage of a very hot market. And Deutsche wasn't able to push pricing in their favor, so Calpine may have been a little bit discouraged.

"I think a deal could have gotten done. They just maybe started things out a little too tight, considering how many people got hurt on this credit last year."

2003 deals not forgotten

The sell-side official, recounting Calpine's 2003 activity in the high yield primary market, suggested that some of the wounds investors suffered in the wake of last year's deals may not have had time to heal.

"Last year they had three tranches for just over $2 billion," the source said. "And then Goldman did an add-on for them. That stuff was issued at par and then traded down to around to the 94-96 range in one week.

"All the par buyers dumped the paper. And the paper rebounded a little bit, but it's still pretty squishy.

"So they couldn't go back to their old reliable buyers because those guys had already gotten cooked on it.

"And once you get in the hands of a hedge fund or the special situation guys, they're looking for yield.

"I think Calpine can come back. But they may have to take another look at their strategy and perhaps readjust their expectations."

Station completes $350 million wide of talk

Monday's sole transaction in the high-yield primary was done by Las Vegas-based gaming and entertainment company Station Casinos Inc.

The company priced a quick-to-market issue of $350 million of 12-year senior subordinated notes (B1/B+) at par to yield 6 7/8%.

Banc of America Securities, Deutsche Bank Securities and Lehman Brothers ran the books on the deal, that came wide of the 6½%-6¾% price talk.

Yet in spite of the Calpine postponement, and in spite of Station Casinos coming wide of talk, one sell-side official insisted Tuesday that the new issue market remains in good shape.

"Some of the frothiness is out of the market," said the source. "Some of our ability to push pricing has been reduced. But for the most part all of the drivers that were in our favor during early-to-mid January still exist. Secondary levels, while down from their record highs, are very strong, historically speaking.

"And there is volume back. Last week we saw the market quiet down. People wanted to let things settle before they started trading. Now we're back to seeing trading volumes that are consistent with a strong market."

Traffic continues to build

Roadshow starts for five junk bond deals were heard during the second session of the Feb. 23 week.

The roadshow is set to start Wednesday for Friendly Ice Cream Corp.'s $175 million of eight-year senior unsecured notes (B2/B-), which are expected on March 3.

Goldman Sachs & Co. will run the books on the deal from the Wilbraham, Mass.-based ice cream company.

The roadshow started Tuesday for Grande Communications Holdings Inc.'s $125 million 10-year senior notes (CCC), also expected to price on March 3.

Bear Stearns & Co. is running the books for the debt refinancing deal from the San Marcos, Tex.-based internet, local and long distance telephone and cable TV company.

The roadshow starts Wednesday for J.B. Poindexter & Co.'s $125 million of 10-year senior notes (B1), expected to price on March 4, via JP Morgan.

The Houston-based manufacturer of truck bodies and other truck-related products will use the proceeds to refinance debt.

Memphis, Tenn., sporting goods company True Temper Sports Inc. will start a roadshow Wednesday for $125 million of seven-year senior subordinated notes (B3/B-).

Credit Suisse First Boston will run the books on the deal which is expected to price during the middle of the March 1 week.

And the roadshow started Tuesday for American Rock Salt Co. LLC's $100 million of 10-year senior secured notes (B3/B-), which are expected to price on March 9.

Jefferies & Co. is the bookrunner on the offering from the Mount Morris, N.Y. highway de-icing rock salt miner.

Also on Tuesday price guidance of 7½% area was heard Tuesday on iStar Financial Inc.'s $100 million offering of cumulative redeemable preferred stock (Ba3/B+).

The Bear Stearns & Co.-led deal is expected to price by Thursday.

The New York City-based finance company will use the proceeds to refinance debt.

Talk heard on Fedders, Nortek

Price talk of a yield in the 9¾% area emerged Tuesday on Fedders North America, Inc.'s $160 million of 10-year senior subordinated notes (Caal/CCC+), which are expected to price Thursday morning via Credit Suisse First Boston.

Meanwhile price talk of Libor plus 300 basis points area was heard on Nortek Holdings, Inc.'s upcoming $150 million of six-year senior floating-rate notes (B1/B+), which are expected to price on Wednesday morning via Deutsche Bank Securities and Bear Stearns & Co.

Station steady in trading

When the new Station Casino 6 7/8% senior subordinated notes due 2016 were freed for secondary dealings, they were "kinda treading water," said a trader who pegged them right at a very tight par bid, 100.125 offered, while another trader saw the bonds as having eased slightly from their par issue price to 99.875 bid, par offered, "no great shakes," he said.

Calpine busy in secondary

But clearly, the name of the day in the secondary market was Calpine, following the demise of its financing effort. "Calpine was mostly what you saw," said a trader, who characterized the whole situation as "unbelievable."

He pegged the company's 8½% notes due 2011 as having traded down to bid levels in the 75.5-76.5 range, which he estimated were down around two points on the session, around four points in two sessions and about five points from week-ago levels.

Another trader, however, said that while there was "a lot of action" in Calpine, "a lot of bouncing around, net-net [from one day's close to the next ] there wasn't much activity," since the withdrawal of the Calpine financing deal had been widely anticipated - the debt market was rife with rumors on Monday that the Calpine deal would be spiked or, at best, radically restructured.

He quoted Calpine's 8½% notes due 2011 as having fallen as low as 74 bid, 76 offered during the session before coming off those lows to end at 76 bid, 77 offered, which he called unchanged. He saw its 8 ½% notes due 2008 ending little changed at 77.5 bid. 78.5 offered, after having first fallen as low as 75.5 bid, 76.5 offered.

"They traded back up to yesterday's levels."

A market source agreed with that assessment, adding that "they were movin' all over the place - but eventually bounced back."

He saw Calpine's 8 5/8% notes due 2010 as having actually firmed half a point on the session, to 76.5 bid while its 8½% notes due 2010 were seen having improved to 92.5 bid, a three-quarter-point gain, possibly on investor relief that the other shoe had finally dropped and the terrible speculation about whether Calpine would be able to swing the deal was at least finally over.

He also saw Calpine's 10½% notes due 2006 steady at 95.5 bid.

Calpine demise "healthy" for junk

A trader saw the market "in a quandary today, hunting for a bottom." It was his belief that the Calpine deal being cancelled "kind of helped things a little bit, if only for the reason that people were kind of getting the impression that things were going to come, no matter what the price."

The demise of the Calpine mega-deal "helped people's attitudes, that the supply [of new paper] is not unending."

Another trader agreed that while the dramatic end of Calpine's long-running financing saga might on the surface of it seem like a negative for the junk market, "this is healthy."

He saw the market having recently reached a top, in turns of the levels some bonds have been trading at. "Where was it going to go?"

Something clearly had to give. Fundamentally, he said, "the economy is not doing that bad. [Earnings] numbers have been good. Hopefully, we'll get a little bit of a correction to give the guys on the sell side a little more ammo to get some trades done."

The first trader observed that lately "consumer confidence has been down, and the stock market is not acting well. The flow of money is not that compelling. I think people [in junk bond land] are a little lost and gun-shy here."

For the first few weeks of the year, the new deals were coming hot and heavy, and the secondary market was meanwhile continuing to soar, both sides of the junk world being propped up at unsustainable levels by generous liquidity.

"It was like 1998 again," he said, referring to the year of record issuance - very nearly $140 billion - which was followed a year or two down by the road by the market spinning into a downturn as some of the less-credit-worthy deals easily passed through in those heady days began to blow up.

"When you think of the amount of deals that have come this year, it's been pretty intense." Last week alone, he noted, "nine high yield issuers came to market with $2.6 billion in new offerings, bringing the year-to-date volume to $23 billion - almost 75% greater than it was last year at this time."

While most of these deals are being done to tender for existing bonds or otherwise refinance maturing or soon-to-mature debt - 80% of last week's offerings, for instance - and that has resulted in not an overwhelming net amount of new paper for the secondary market to swallow, after deducting the volume of the debt being refinanced, "still, it's a lot of paper," he said.

News reports indicated that various analysts and other Calpine watchers opined that one of the things that doomed the company's new effort to sell $1.05 billion of new bonds is the fact that it already has $17 billion of total debt, including something like $5 billion of new debt incurred last year. "People are getting full of the name. They're getting saturated with their [existing] bonds," the trader said.

Apart from Calpine, he said "the rest was hit and miss. There was no theme."

El Paso lower

He saw El Paso Corp. debt easier and other utility issues off as well, and pegged Tenet Healthcare Corp. bonds off about half a point.

A market observer saw El Paso's bonds - perhaps in sector sympathy with fellow energy producer Calpine moving "down and then back up and then back down, but ending almost unchanged for the day," despite a lack of real news on the Houston-based energy operator.

He saw El Paso's 7 7/8% notes due 2012 half a point lower at 89 bid, its 8.05% bonds due 2030 a point down, at 80.5 bid, and its 7 ¾% notes due 2013 unchanged at 94 bid.

Smithfield Foods Inc.'s 7 5/8% notes due 2008 were unchanged at 104.5, even as the Smithfield, Va.-based meat processor reported sharply improved earnings despite the fallout from the mad cow disease scare.

Smithfield earned $46.1 million (41 cents per share) in its fiscal third quarter, up from $5.3 million (five cents a share) a year ago.

Carnaval keeps emerging markets slow

An emerging markets bond trader told Prospect News on Tuesday that trading volume remains low, due to the Brazilian Carnaval celebration.

"Emerging markets has been grinding higher over the past three trading sessions," said the trader. "The low trade on C bonds, in my recollection, was last Friday, around 91.625. It's closing out today at 95.875.

"The liquidity was very bad going down and has been the same on the way up. The reason is because you have Carnaval and the markets in Latin America are shut. They'll reopen parts of some markets tomorrow. Brazil will be open by mid-day tomorrow.

"Overall the liquidity is very low. Volume is very low. There are not really very many dedicated money accounts, including hedge funds, participating in this market. And they won't until the locals come back and decide where to take this market."

The trader mentioned the Indonesian sovereign, which will reportedly be marketed during the first week of March.

"I think they are looking to do at least $750 million," the source said, "but if they could do $1 billion that would be fine.

"I'm sure it will come tight."

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