Calpine continues firming trend; homebuilder bonds unhurt by data; three deals join slate

By Paul Deckelman and Paul Harris

New York, Feb. 27 - Calpine Corp. debt continued to bounce back from its recent lows Wednesday on indications the embattled power producer has lined up a new credit facility; Rite Aid bonds were also up after that company announced amendments to its credit facility and reaffirmed earnings guidance.

In the primary market, new deals for Steel Dynamics, Entravision Communications and Joy Global were all heard to be preparing roadshow presentations and Entercom Radio priced a new offering.

Sources on the buy- and sell-sides had been broadcasting the virtues of Entercom Radio ever since the company launched its deal for $150 million of 12-year senior subordinated notes on Feb. 20.

The price talk of 7 5/8%-7 7/8% which the market heard Tuesday, was, in the word of one investment banker, "rich."

Nonetheless Entercom priced its notes Wednesday via Credit Suisse First Boston and Deutsche Banc Alex. Brown at the low end of talk, with a yield of 7 5/8%.

In addition, three new deals joined the new-issue calendar Wednesday.

Entravision Communications, a Santa Monica, Calif. TV, radio, billboard and publishing concern, announced it was bringing $200 million of seven-year senior subordinated notes via UBS Warburg. The roadshow starts Tuesday, with pricing expected around March 12, according to a syndicate source who also said that the company would use the proceeds to repay existing debt.

Joy Global, Inc., the Milwaukee mining equipment company formerly known as Harnischfeger Industries, Inc. prior to emerging last July from Chapter 11, announced a new offering of $200 million 10-year senior notes via joint bookrunners Credit Suisse First Boston Deutsche Banc Alex. Brown. The roadshow starts Monday, with pricing expected during the week of March 11.

Also on Wednesday, Fort Wayne, Ind.-based mini-mill steel producer Steel Dynamics, Inc. let it be known that its deal for $200 million of seven-year seniors will begin its roadshow Tuesday, via Morgan Stanley. Pricing is set for March 14 according to a syndicate source.

Another media concern, Toronto-based broadcaster and producer Corus Entertainment upsized its offering of 10-year senior subordinated notes to $375 million from $200 million. Price talk of 9% area was heard Tuesday. The deal, via Merrill Lynch & Co., is expected to price Thursday morning.

And timing emerged Wednesday on a deal announced early in the week of Feb. 25: the B&G Foods, Inc. $100 million add-on to its 9 5/8% senior subordinated notes due Aug. 1, 2007 (existing ratings B3/B-) is currently on the road, Prospect News heard from a syndicate source. The new notes, via dealrunner Lehman Brothers, are expected to finish roadshowing on Monday.

Back in the secondary, Calpine's bonds "had a pretty good day, up about two points," said a trader who quoted the company's 8 5/8% notes due 2010 and 8½% notes due 2011 up about two points on the session to 72 bid/74 offered; over the past two sessions, those bonds have firmed about five points, "not on any real new news," he said, "but just supply and demand."

Calpine "looked a little stronger," said another trader who quoted the senior bonds as having opened around 70 and then having "moved up a couple of points" before most liquidity in the name "dried up around the end of the day," leaving those bonds at bid levels in the 72-73 area, up from 70 on Tuesday and from the upper 60s before that.

There was no additional elaboration from the company on the statement late Monday night which indicated that the San Jose, Calif.-based independent power producer is "currently finalizing its discussions with lenders" on possible restructuring options aimed at giving it "overkill liquidity," including an expanded and secured credit facility.

With the market having recently reacted badly on both the equity and the debt sides when Calpine indicated that it still had not closed on a new financing facility which was to have been completed in January, indications that lenders are still willing to take a chance on Calpine despite its own problems and those of its industry (although not that much of a chance - the new facility would, after all, be well-secured) - were being seen as a positive.

But the trader noted that while the company's bonds did rise, its shares, after having traded "really well" in the morning, came down off those peaks to end down about a nickel on the session in New York Stock Exchange dealings.

He saw a similar pattern in the shares of Calpine rival AES Corp., which finally ended down two cents; meanwhile, the Arlington, Va.-based company's bonds were seen up 3½ points on the session Wednesday, with its 8 7/8% notes due 2011 closing at 64.5 bid and its 8% paper ending at 66.

Outside the power generation sphere, Rite Aid Corp. Bonds were seen firmer, after the Camp Hill, Pa.-based drugstore chain operator announced the amendments to its $1.9 billion senior secured credit facility.

Rite Aid's 6 7/8% notes were up two points at 55, its 7 5/8% notes likewise ahead a deuce at 66, and its 7 1/8% bonds up three points at 64.

Rite Aid said that amending the facility will allow the company to issue senior secured notes, as has been agreed with the plaintiffs, as the final payment of its previously announced settlement of consolidated securities class action and derivative lawsuits against the company.

Under terms of that settlement, Rite Aid had the option to pay the $149.5 million balance due the class and derivative action plaintiffs in any combination of cash, common stock or notes. It has already paid the $45 million cash portion of the settlement with proceeds from insurance; the amendment now gives Rite Aid room under its credit facility covenants for the new senior secured notes, which will initially have a floating rate and mature in 2006.

Apart from allowing Rite Aid to finish putting the lawsuit behind it by issuing the notes to the plaintiffs, the credit facility amendment also gives the drugstore giant more operating flexibility by resetting the covenant levels for the life of the facility, which comes due in 2005.

Rite Aid also reaffirmed its previously announced earnings guidance, projecting EBITDA (earnings before interest, taxes, depreciation and amortization, LIFO charges, losses from asset disposals, nonrecurring legal and accounting expenses and non-cash expenses, a key measure of cash flow generation and potential ability to service debt) of $140 million for the 2002 fiscal fourth quarter, which ends March 2.

The company also reaffirmed EBITDA guidance of $530 million to $580 million for fiscal 2003, which ends on March 1, 2003.

News of the credit facility amendment and the prospective completion of the legal settlement process, plus the reconfirmed guidance was just the right remedy for the drug chain's shareholders as well as bond investors; its stock was up 40 cents (15.21%) at $3.03 in NYSE trading. Volume of 12 million shares was about double the normal activity level.

Elsewhere, the Commerce Department reported Wednesday that sales of existing homes dropped 14.8% to a seasonally adjusted rate of 823,000 units in January from a seasonally adjusted pace of 966,000 in December.

But the news was seen to have had little impact on the bonds of homebuilding companies, most of which were seen little changed at levels at or above par.

Toll Brothers' 8 1.4% notes were unchanged at 101 bid; D.R. Horton likewise held steady, its 10½% notes hanging in at 108 bid and its 10% notes at 102.5 bid. Beazer Homes' 8 5/8% paper stayed at 103. Lennar Homes' 9.95% notes were up half a point at 110.5 bid.

"We didn't see too much activity in the sector," a trader said. "The homebuilders have gone up so far, so fast, and seem to have settled in at high levels, that there was not much reaction" (to the government numbers).

Another trader noted that while the stocks of homebuilding companies initially took a heat after the unexpectedly large drop in January activity was reported Wednesday morning, "by the end of the day, only three high yield homebuilders were off (Beazer, Lennar and NVR) and the rest were all back up. To have that kind of number come out and to only have three (out of 14) down on the day is pretty remarkable."

The trader opined that when government figures came out earlier in the week showing a large gain in January sales of existing homes, "my gut reaction was that this can't be good for the builders, because if people are buying so many 'recycled' houses, there just can't be enough demand to keep new-home sales at the same pace as they were last year."

But he said Toll Brothers reported that their level of deposits put down by would-be buyers was up 31% in the quarter from year-ago levels. When Toll Brothers - a housing industry leader, as the major builder of houses in the luxury class - "has such a huge increase in deposits, you've got to think that the next couple of quarters are going to look pretty good."

The stocks of the homebuilders all traded down initially on the news out of Washington on Wednesday, "but most of them traded right back up, and they had zero effect on the bonds whatsoever," he continued.

"People still believe in the long-term story behind these homebuilders" he declared, in noting that sector's steady response to the bad news. "It looks like these builders have the interest (of the customers) in the form of these deposits for new houses to be built, and mortgage application volume for new buyers is pretty strong."

That having been said, however, he noted that the homebuilders' bonds "are showing strength all around, with a majority of them at or above par and a few with lower coupons trading just south of par, not much, and I can't name one trading at any kind of a discount" to par.

With the bonds already having made their move up to those kind of levels over the last 12 to 18 months, the yields on luxury builder Toll's bonds are at or just inside of 8%, "the yields on the rest of the move-up builders and the ones who build homes for first-time buyers trade in the low-to-mid 8% yield, and some of the weaker builders (he named Hovnanian subordinated bonds) are trading with a low 9% yield, there are better places to put money to work (in terms of yields) than homebuilding. I can't think of a compelling reason to buy these bonds," given the rich levels at which they currently trade, he concluded. "I can't justify paying the kind of high premiums that some of these bonds command."

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