Calpine extends losses; Alexion tumbles on disappointing trial; Placer Dome eyed

By Rebecca Melvin

Princeton, N.J., Nov. 23 - A day ahead of the Thanksgiving holiday, the convertible bond market was quiet, but among issues trading Wednesday were those of Calpine Corp. and Alexion Pharmaceuticals Inc., traders said.

Players were also eying the convertibles of Placer Dome Inc., which appeared unchanged, but one trader said he wouldn't be surprised to see the bonds 2 points higher after the mining company's board urged shareholders to reject the Barrick Gold Corp. hostile takeover bid for $9.2 billion.

The Calpine bonds extended losses following a court ruling on Tuesday that turned Calpine's plan for asset sale proceeds upside down and threw its financial viability into question.

Also lower on an outright and dollar-neutral basis were the Alexion convertibles after the drug maker reported that late-stage clinical results for its pexelizumab heart drug failed to meet expectations in reducing heart attack or death in some patients who had undergone coronary bypass surgery.

Elsewhere in the convertible bond market it was quiet.

"It was a ghost town today," a New York-based hedge fund convertibles player said.

The stock market held a regular session ahead of the holiday, but the bond markets closed early, and many convertibles traders left their desks by 2 p.m. ET.

In the primary arena, no new deals materialized in the last three days before Thanksgiving, but sellside sources were optimistic that new deals would get done in the first two weeks of December.

"Last year, the December calendar was phenomenal for new issues," a New York-based sellsider said. "The first couple of weeks of December in the post Nov. 15 market is the place." The sellsider was referring to the Nov. 15 deadline for redemptions.

A second sellsider agreed, "November was the best month of the year so far for new issues, so there's no reason to expect that that wouldn't continue in early December," he said.

Calpine extends losses

The Calpine 4.75% convertibles traded down another 3 points after sliding 6 points on Tuesday after a Delaware chancery court judge ruled that the San Jose, Calif.-based integrated power company was wrong to spend $313 million of proceeds from the September sale of its natural gas reserves to buy natural gas for its power generating plants.

Calpine shares extended their slide for a second consecutive day, closing down, but off their lows, at $1.18, down 21 cents, or 15%. On Tuesday, the shares lost 20.6%.

"In the aftermath of yesterday's decision I think they are on a collision course with zero," a New York-based sellside analyst, referring to the amount of unrestricted cash the company is soon liable to have. "They're going to have to repay the money," he said, adding that there is less than $400 million in unrestricted cash available in which to do so.

Trading in the Calpine convertibles wasn't extensive as many players have moved out of the name in the last six months; in addition stock borrow is problematic making it difficult for hedged plays, traders said.

Nevertheless the convertible 4.75% and 6% bonds had traded. The 7.75% convertible notes, of which $650 million was sold in June via bookrunner Goldman, Sachs & Co., are not often quoted or seen in trade.

The 7.75s were mostly used to redeem the 5% High Tides III trust preferred securities. And 77% of that issue is held by Franklin Resources. The part not used for the High Tides was used to repurchase a portion of the outstanding principal amount of the 8.5% senior unsecured notes due 2011.

CreditSights analysts underscored the point that Calpine will have to pay back the funds spent on natural gas purchases, putting the likelihood at greater than 80% that the judge's decision will stand. The analysts added, "This decision has far-reaching consequences for Calpine as it means that any sale of the Geysers will be tied up by these documents."

The analysts, Dot Mathews and Andy DeVries, also said in their report: "Calpine: When the Music Stops" that the decision complicates the relationship between the first- and second-lien bonds and makes it much harder for cash-strapped Calpine to keep going.

"This ruling also moves Calpine closer to bankruptcy," Mathews and DeVries wrote. "'Cash management' in the form of 'liquidity transactions' has kept Calpine afloat as it burned about $3 billion in cash over the last two years."

Sale of the Geysers, viewed at $2.7 to $3 billion in value, along with the Rosetta proceeds was seen as providing enough proceeds to retire the first- and second-lien bonds. But that would deprive the company of two of its best assets and still leave the company with a heavy debt burden, and less cash to pay operating expenses, interest and capex, the analysts said.

The first-lien notes include the 9.625% notes due 2014 of which $646 million is outstanding, CreditSights said. The second-lien notes include the floating-rate notes due 2007 of which $489 million is outstanding; the 8.5% notes due 2010 of which $1.15 billion is outstanding; the 8.75% notes due 2013 of which $900 million is outstanding; and the 9.875% notes due 2011 of which $400 million is outstanding. The total of both first- and second-lien notes comes to $4.585 billion.

At the open the Calpine 4.75s traded at 29.25 versus a share price of $1.39. Later they were seen at 29 versus $1.15, according to a New York-based desk analyst.

Alexion falls after data disappoints

The 1.375% Alexion convertibles traded at 87 and 88 on Wednesday, down from above par previously and putting the bonds lower on a dollar-neutral basis. The company reported disappointing results for a late-stage clinical trial of a drug aimed at reducing the incidence of heart attacks following coronary artery bypass surgery.

Cheshire, Conn.-based Alexion said the phase 3 trial of pexelizumab found that the drug did reduce the combined incidence of heart attack or death through 30 days following the surgery in moderate-to-high risk patients but that it didn't "meet the threshold for statistical significance."

Alexion also said it will "assess the implications" of these results on its second international phase 3 trial of pexelizumab, which is looking at the benefits of using the drug in patients treated with angioplasty. In addition, data from a phase 3 trial of Alexion's eculizumab for the treatment of a rare form of anemia are expected in the first quarter.

Alexion works on a number of therapeutic products aimed at treating patients with a wide array of severe diseases. But the news on Wednesday caused credit watchers to widen their credit assumption by 100 to 200 basis points, a sellside trader said, who added that the convertibles were weaker dollar neutral.

Placer Dome rejects Barrick bid

The 2.7% convertibles of Vancouver, B.C.-based Placer Dome were seen unchanged at about 110 bid, 112 offered after the company said the Barrick takeover offer was financially inadequate and opportunistic. Speculation was also rising about a rival bid or a bidding war for the Canadian mining company.

Among possible White Knight candidates was Denver-based Newmont Mining Corp., which was seen having better synergies with Placer due to assets of both companies that are in close proximity in Nevada.

International White Knight potentials included mining companies in Russia and South Africa, a West Coast-based buyside analyst said. "Another bid is coming in and there are a couple of players."

Under the offer that is being rejected, shareholders would get $20.50 in cash, or a combination of 0.7518 of a Barrick common share plus 5 cents in cash, for each Placer Dome share, at the maximum share, minimum cash end of the proposed deal range.

The Placer convertibles, which don't have takeover protection, made their big move when the Barrick bid was first announced, losing 4.5 points on a hedged basis, but moving higher on an outright basis.

Since then the convertibles "have improved about 2 points since the deal cracked," a sellside trader said, referring to the late-October move.

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