AES falls on lower earnings estimates; Talk of big Calpine deal

By Paul Deckelman and Paul A. Harris

New York, Sept. 26 - AES Corp. bonds took a tumble Wednesday after the Arlington, Va.-based global power producer warned that earnings would come in well below previous expectations. In the high yield primary market, talk circulated that a rival power producer - Calpine Corp. - is looking at bringing a substantial new offering to market.

Concrete information on Calpine's new issue could surface as early as Thursday, sources hinted. But the rumors circulating in the primary market Wednesday suggested the energy firm might come to market very soon with a deal that could top $1 billion. Initial word is that it might appear in two currencies, U.S. dollars and Canadian dollars, and that Credit Suisse First Boston will act as bookrunner. However confirmation of the precise shape of the deal could not be obtained and the size in particular is subject to change.

That was not the only sign of life in the primary market Wednesday. Edmonton, Alberta-based Luscar Coal Ltd. is marketing a deal for $250 million senior notes, due 2011. According to a source close to the deal, Goldman will run the books, with pricing expected Oct. 5, at the conclusion of a roadshow set to commence Sept. 28.

The bonds are non-callable for five years, the source said. Proceeds to pay off bank debt, and go for general corporate purposes.

Also Wednesday, the Sioux City, Iowa fertilizer concern, Terra Industries Inc.'s subsidiary, Terra Capital Inc. unwrapped a deal for $200 million senior secured notes due 2008. Pricing is set for Oct. 3, according to a source close to that deal. Salomon was identified as the sole bookrunner, according to the source, who added that Credit Suisse First Boston will co-manage.

While the primary is returning to a better level of activity, Brendan White, portfolio manager of the Touchstone High Yield Bond Fund, said he still sees a nervous tone.

To bring the market back into balance, he says two concerns need to be resolved.

"One is the passing of the uncertainty, with respect to the military action," White explained. "There's going to be a retaliatory strike. There are many who think there could be additional terrorist attacks. And as long as that uncertainty - that overhang - exists, it's going to be very difficult for people to have confidence in the capital markets.

"Secondarily, we're looking for an end to the recession," White added. "And when are we going to see that? I don't think we're going to see that anytime soon. I think it's going to be a quarter, or two, away. There's still a tremendous amount of excess in the economy. The Fed appears to be pulling every lever that it can. And I'm sure they'll be successful. But it's not going to be next month."

Nonetheless, White says current yields make sense. He noted a recent research report from Merrill Lynch which said the market's current spread of about 850 basis points implies a default rate slightly in excess of 11%, "right around where Moody's is predicting defaults."

"That would indicate that the high yield market might be fair," he said, adding: "Fair does not mean cheap. I would think there's still going to be an awful lot of volatility, and an awful lot of uncertainty, going forward."

In trading Wednesday, one name seeing particular volatility was AES. It "was hit pretty hard," a trader said, while another said its debt "has fallen out of bed."

He saw AES's 9.625% notes down at least another three to four points on the day to around 88 bid; only about a week to 10 days ago, he noted, the bonds had been hovering around the 103-104 bid level.

Its 8.375% notes due 2007 were quoted as low as 77.5, down some eight points on the session, after having declined about five points the previous day, when the earnings warning first came out.

AES's 9.375% notes due 2010 and 8.875% notes due 2011 were quoted as low as 85 bid during the session; in Tuesday's trading, the former bond had been quoted around 98, and the latter around 93.5. The normally sleepily traded bonds - generally considered a little too rich for many junk accounts - were actively traded Wednesday, with the FIPS market tracking system showing $41.8 million of the 8.875% notes and $23.5 million of the 9.375s having traded, well in excess of the usual turnover in the name.

AES had warned late Tuesday that its 2001 earnings would fall well short of previous estimates, cutting its 2001 earnings-per-share estimates to a range of $1.25 to $1.45, well down from previous expectations of a range of $1.75 to $1.90. Analysts had predicted earnings in the $1.60 to $1.90 range.

The sharp downward reduction - which the company said was triggered by such factors as the Sept. 11 terrorist attacks and their effect on the overall economy, poor foreign exchange rates and lower power prices in the U.K. - likewise caused a slide in AES's shares, which lost fully half their value, ending down $12 at $12.25.

Another high yield issuer predicting lower earnings and thus triggering a slide in its bonds was Primedia Inc., the New York-based magazine publisher and website operator.

Its 8.5% notes due 2006 were quoted around the 80 bid level, down from the high 80s earlier in the week, after the company warned that it now expects fiscal 2001 EBITDA (earnings before interest, taxes, depreciation and amortization, the key bond market cash flow measure) to fall below last year's $250 million.

Previously, the company had projected EBITDA from continuing operations of between $280 million and $300 million. Primedia cited the Sept. 11 terrorist attacks in the U.S. and the effect they have had on an already softening economy and weakened advertising market. Primedia shares were meanwhile down sharply in response to the weakened earnings guidance.

Elsewhere, Exodus Communications Inc. announced during the afternoon that it would attempt to restructure under Chapter 11. The filing was anticlimactic, as it had been the subject of intense speculation the previous session and had even been expected for quite some time before that.

Exodus' various issues of junk bonds, such as its 11.625% notes due 2010, had fallen into the mid-teens Tuesday and began trading flat, or without accrued interest (an effective loss of another several points beyond the nominal price change), after The Wall Street Journal reported that a filing was nigh for the troubled Santa Clara, Calif.-based web hosting company. On Wednesday, they were "in the dumpster," a trader said, having declined still further, to around the 10-12 range.

The trader meanwhile heard Global Crossing Holdings Inc. bonds "straddling the 51-52 bid level;" the Hamilton, Bermuda-based international long-haul telecom operator owns 20% of Exodus and plans to take a non-cash third quarter charge reflecting its stake in the beleaguered internet hosting company.

Meantime, the hard-hit airline sector "seemed to stabilize" Thursday at its recent lower levels, a trader said. "They're down 15-20-25 points from where they all had been (before Sept. 11), but there was no further deterioration."

He saw Northwest Airlines' 8.52% notes and 8.70% notes "hanging in" at the same levels they held Wednesday, around a wide 72 bid/76 offered for the former and 68 bid/69 offered for the latter.

Significantly, he said, his shop's junk desk would soon pick up coverage on such newly junked issues as Delta, and UAL Corp., which with AMR Corp. were recently knocked off their investment-grade perch by the major ratings agencies but which continued to be traded off the high grade desks at some houses. The move to the junk desks would seem to be a market validation of the ratings agency actions and an indication that these newly fallen angels aren't expected to get their wings back anytime soon.

Overall, a trader said, market activity remained restrained, especially with the afternoon departure of many participants ahead of Thursday's Yom Kippur holiday. "Tomorrow," he said "will likely be totally dead."

End

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