Calpine convertibles drop after ouster; InterMune adds on hedge; Frontier Airlines launches deal

By Rebecca Melvin

Princeton, N.J., Nov. 29 - Market players took badly the news Tuesday that Calpine Corp.'s two top executive managers, including its founder, were departing the troubled independent power producer, which appears to be teetering toward bankruptcy.

The convertible bonds fell about 6 to 7 points to trade in the low 20s, and its shares lost about half their value to close at 54 cents.

Calpine was a focus of the session, traders said, with other activity toned down following a burst of trading on Monday and with another slight bias to the sell side for the session.

But there was buying "here and there," encouraged by company specific news or valuation issues, a New York-based sellside convertibles director said, noting Maxtor Corp., which found buyers for its 2.375% convertibles after they started to look compelling at the 83 handle, he said.

"The stock has trended down since the beginning of August from about $6, to about $3.25 at the end of October, the beginning of November. That dragged the bonds down to a level that has attracted buyers in the last few days," he said.

In addition, news viewed as credit positive for InterMune Inc. encouraged trading of its convertible bonds, which gained 1.5 points on a hedged basis as its shares sold off. The trading followed an analyst downgrade the day after news that the biotech sold its right to a product in development, a Connecticut-based buysider said. "This is the way it is supposed to work!"

Another new convertible issue was launched Tuesday, this one from Frontier Airlines Inc. for $80 million of 20-year convertibles, which joined a new deal launched Monday by Platinum Underwriters Holdings Ltd., for roughly $150 million of mandatory convertible preferred shares. Both issues were expected to price Thursday after the close.

Platinum Underwriters' issue found buyers in the gray market at 100.25 to 100.75, a buyside source said.

Frontier seen cheap at the mids

With price talk for Denver-based Frontier at 5% to 5.5% for the coupon and 20% to 25% for the initial conversion premium, one New York-based analyst said the deal looked 2.1% cheap at the middle of talk, using a credit spread of 1,100 basis points over Treasuries and a volatility of 40%, accounting for tough borrow.

A New York-based sellside trader said, however, that stock borrow didn't look that tight and put the deal 4 to 5 points cheap, using 1,200 bps over Libor and a volatility of 40%.

But regardless of how cheap the deal is, some buyers said they won't bite due to its industry sector. "We don't do airlines," one source said.

Frontier, a low-cost, regional carrier with 49 aircraft, plans to price $80 million of 20-year convertibles and there is a $12 million greeshoe. Morgan Stanley is bookrunner for the deal, with Citigroup Global Markets acting as co-manager.

The bonds will be non-callable for five years and are putable in years five, 10 and 15.

Frontier plans to use proceeds to fund working capital and capital expenditures, including the purchase and financing of aircraft and expansion of its operations.

Platinum mandatory differs slightly

It was harder to get a valuation on the Platinum Underwriters' deal because it's not a "regular" mandatory under its payout structure, referred to as Prides Plus by its underwriters.

"The difference is subtle," a syndicate source said, referring to the payout structure. "From the investor's perspective, you're short a put at 100 and long 0.83 calls at 120% of the reference price in a regular mandatory. But in this one, you're still short a put at 100, but you're long one full call at 125% of the reference price."

Essentially it allows the company to get a higher premium and provides the investor one full call, he said. Price talk on the deal is for a dividend of 6% to 6.5% and an initial conversion premium of 23% to 27%.

In 2002, Platinum Underwriters sold $125 million of three-year regular mandatory convertibles at par of $25 to yield 7% and with a 22% initial conversion premium. The deal priced at the rich end of talk.

Calpine shorts out on shake-up

The 4.75% convertibles and 6% convertibles of Calpine fell after news that Calpine's two top executive managers, Peter Cartwright, Calpine chairman, president and chief executive, and Robert Kelly, executive vice president and chief financial officer, were leaving the company.

Some market observers felt the press release was vague about whether the two quit or were fired; but many concluded that the move was an ouster given that the press release stated that the board believed the changes were "essential to better address Calpine's financial challenges and to provide a new direction for the company."

The 4.75% bonds were actively traded, but trended lower through the session, trading at midday around 24 bid, 25 offered and closing at 22.75 bid, 23.75 offered, versus a share price of 54 cents.

The 6% convertibles traded at 23 bid, 24 offered versus a 70 cent share price. And the 7.75% convertibles, which were issued earlier this year, were last seen in trade on Nov. 9, according to a buyside trader.

"Someone mentioned this morning that bankruptcy looked like it was around the corner, and I said, 'It's on the same block,'" the trader said.

A separate convertible arbitrage source, who hadn't been involved in Calpine trades on Tuesday, said, "Somewhere along the line there was an opportunity to make money, but that hasn't been the case for some time."

On Tuesday, Calpine director Kenneth T. Derr was named chairman of the board and acting chief executive, with a permanent replacement expected within a couple of weeks.

Derr retired from Chevron Corp. in 1999, having served 11 years as chairman and chief executive.

Eric N. Pryor, who was previously deputy chief financial officer, will serve as the interim chief financial officer.

Of Cartwright, Derr said, "Pete founded Calpine and has been the driving force behind the company's tremendous growth in the North American power industry. His 20 plus years of leadership have culminated in Calpine becoming one of North America's largest power producers."

But Calpine, which unveiled a significant debt reduction plan last spring, has suffered a number of setbacks recently that have dealt blows not only to the debt reduction plan, but also to its operating capabilities.

The San Jose, Calif.-based company aimed to cut debt by $3 billion this year but warned that it wasn't likely to attain the goal when it reported quarterly results on Nov. 3.

At that time, it said that slower-than-anticipated asset sales and legal tie-ups with about half the proceeds also contributed to its quarterly loss.

Its total debt stands at $17.2 billion, and interest expense on that debt, which was higher than expected by about $40 million after tax, contributed to its loss of $216.7 million, or 45 cents a share, for the third quarter.

Also undercutting performance were weaker "spark" spreads, or the difference between the price it paid for natural gas used to generate electricity and the price of electricity it sold.

In terms of liquidity, cash and cash equivalents totaled $843 million. But including $1.11 billion in restricted cash relating to asset sale proceeds, total liquidity was $1.95 billion, the company said.

At the end of October, Calpine repurchased $240 million of debt, but it said it had no further debt repurchase requirements for the fourth quarter. For 2006, debt repurchase obligations total $1 billion, company officials said.

Another setback for the company was last week when a Delaware judge ruled that Calpine misspent about $313 million of proceeds of asset sales on natural gas supplies. Calpine had brought the suit in response to the proceeds dispute that prompted a bank trustee in September to freeze about $400 million being held in an escrow court.

Calpine sued for its right to withdraw that money but was refused. Bondholders want the funds returned to the escrow account, but a remedy hasn't yet been decided.

Calpine owns, leases and operates integrated systems of plants in 21 states and in three Canadian provinces and is building a plant in Mexico.

Hedge players gain on InterMune moves

The InterMune 0.25% bonds traded higher by more than 2 points, to as high as 85.75, versus stock at 16 on Tuesday, compared to a close of 83.375 on Monday, according to a buyside source.

The bonds closed nearly flat, but compared to the lower share price, hedge players were still left with a gain of about 1.5 points, the buysider said.

The moves were spurred by InterMune's news after the close Monday that it would sell its hepatitis C drug Infergen to Valeant Pharmaceuticals International for $135.5 million.

Brisbane, Calif.-based InterMune said it will trim its focus to three programs, including Actimmune for idiopathic pulmonary fibrosis, Pirfenidone for idiopathic pulmonary fibrosis and the hepatitis C virus protease inhibitor.

InterMune said it will continue work on its hepatitis C virus protease inhibitor program, at least through phase 1b, without a development partner.

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