Calpine, Mirant convertibles mixed in active trade

By Rebecca Melvin

Princeton, N.J., Nov. 30 - Calpine Corp. convertibles traded actively again on Wednesday, with the 4.75% convertibles holding their ground after sliding Tuesday, while the 6% convertibles fell at least several more points to 18 after not trading as actively the day before. On Tuesday, a management shakeup and speculation that the troubled independent power producer may be close to a Chapter 11 bankruptcy filing caused the stocks and bonds of the company to tumble.

Also in trade Wednesday was Mirant Corp., another troubled power producer, but this one already under bankruptcy court protection, which saw its 2.5% convertibles move higher. The Atlanta-based company's 2.5s gained a couple of points to 105 in active trade due to the fact that the paper is soon to be convertible, a Connecticut-based sellside trader said.

"You've got every equity fund out there buying them because they are going to be convertible into stock, and it's the cheapest way to get stock," the trader said.

Meanwhile, Mirant's 5.75% convertible bonds, which haven't been as liquid as the 2.5s, traded lower by about a point. But Mirant shares, which trade over the counter, gained three cents, or 2.56%, to $1.20.

Early on, the convertible bond market traded mixed, with some buyers picking up bargains. But later it turned south, following the broader stock markets downward.

A strong 4.3% annual rate of gross domestic product reported by the Commerce Department for the third quarter stirred fears among investors that the Federal Reserve would continue raising interest rates.

The GDP number, driven by personal spending and business investment, was revised upward from a preliminary reading of 3.8% growth and beat forecasts for 4% growth. GDP measures the value of all goods and services produced in the United States.

Some financial sector convertibles, which are sensitive to interest rates, traded lower in line with their underlying shares including American Express Inc.'s 1.85s and CompuCredit Corp. 3.625s, both of which were lower by about a point.

A couple of telecommunications equipment makers mentioned in trade were lower including Lucent Technologies Inc. and Juniper Networks Inc. There didn't appear to be company-specific or sector news related to the decline, a sellside convertible analyst who covers the sector, said.

On the upside, Maxtor Corp.'s 2.375% convertibles traded higher by two points early in the session, even as its shares ended down by nearly 1%. Also higher by as much as 0.75 point were the convertibles of Cymer Inc., a semiconductor equipment maker.

Finally, the Alloy Inc. 5.375% convertibles - a small issue of about $65 million - gained Wednesday after the company suggested amendments to the issue indenture in light of a planned spin off of a subsidiary, called dELiA*s Inc.

Alloy, a New York-based media, marketing and retail concern geared to young adults, proposed that there be no change in the conversion price for the bonds and that subsequent to the spin off the securities be convertible into shares of common stock and shares of dELiA*s.

Recently, the company said it remains on track to complete the dELiA*s spin-off by the end of its fiscal year Jan. 31.

As for the primary market, it looked like the mandatory convertibles of Platinum Underwriters Holdings Inc., expected to price Thursday, generated more interest so far than Frontier Airlines Inc.'s 20-year convertibles, expected to price at the same time.

A buyside trader said that the mandatories were oversubscribed and were at 100.25 bid in the gray market.

Calpine remains active

Calpine's 4.75% and 6% convertible bonds continued to trade actively on Wednesday, with the 6% slipping to 18 and closing out at 18.5 bid, 19 offered, compared to trades on Tuesday at 23 bid, 24 offered.

The 4.75% bonds, which were more actively traded on Tuesday, were seen going out at 24.25 bid, 24.75 offered, in the range at which they traded Tuesday, but higher than their close, which was put at 22.75 bid, 23.75 offered by one firm.

"The old management fought so hard to keep the company afloat. They did not throw in the towel. So it certainly makes sense that bankruptcy is more likely now that they are gone," a buyside outright analyst said.

"There's the concept of the 'zone of insolvency,' which has to do with a point at which management's fiduciary responsibility switches from equity to the creditors," he said.

On Tuesday, the company's stock and bonds tumbled after news that its two top executive managers including Calpine chairman, president, chief executive and founder, Peter Cartwright, were leaving the company.

The Calpine 7.75% convertibles were quoted at 13, but weren't seen in trade.

Calpine shares dropped 5.56% to $0.51, after falling about 50% on Tuesday.

Although trading of the Mirant convertibles was said to be unrelated to the Calpine activity, the two issuers share some interesting parallels.

After Mirant filed for bankruptcy court protection two years ago, its convertible bonds took a big hit, but later they recovered and recently have been trading around par.

"Mirant was a good comp [for Calpine] a couple of years ago. But then Mirant entered bankruptcy because it didn't have efficient plants. But those older, coal plants turned out to have more value than people realized," the buyside analyst said.

"A lot of things can change. Those bonds went back up to par," he added.

Cymer bonds edge higher

The 3.5% convertibles of Cymer "widened a little" in trade Wednesday, a sellside source said, who added that last week the bonds had "come in" and on Tuesday they were in line with their underlying shares.

The San Diego-based company supplies deep ultraviolet light sources for semiconductor manufacturing.

The sellside shop had a block of the convertibles for sale, and made a market in them that was modestly successful.

The Cymer 3.5s traded at 97 bid, 97.75 offered, up about 0.50 point to 0.75 point, compared to 96.50 bid, 97.25 offered on Tuesday.

Cymer shares closed up 26 cents, or 0.68%, at $38.16.

There were some buyers for the Cymer bonds, another person at the same firm said. But overall activity in convertibles is quieting as many players start to tie up their purse strings in the absence of major, breaking news to lock in performance levels for the year.

"I think it has to do with the fact that the year got off to a bad start, and then things got a little better, and clients want to keep whatever positive upside they have," the source said.

Convertibles post strong November

The tone for December follows a strong November, which saw the highest level of new issuance for the year, and better buyers for many issues that had been beaten down in previous months, sources said.

Total new issuance volume for the month jumped to $6.68 billion in proceeds, its highest level since $7.75 billion posted almost two years ago in March 2004. Issuance was almost four times the $1.79 billion recorded in October.

Nevertheless, activity remains below last year's levels, with 2005's $30.50 billion year to date, at only 75% of the $47.60 billion in the same period for 2004.

Goldman Sachs & Co. rode November's surge in convertibles issuance to take the number one spot among underwriters of convertibles for the year to date, according to data compiled by Prospect News.

With $3.28 billion of business in November, more than any other firm, Goldman jumped from its previous fourth place to the top position.

Among the Goldman deals for November were $2 billion of convertible senior notes for Prudential Financial Inc. and $1.265 billion of convertible senior notes for Qwest Communications International Inc.

The Prospect News figures cover dollar-denominated deals offered in the United States as registered transactions or under Rule 144A. They include deals issued by investment banks linked to a single stock.

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