Frontier new issue gains in active trade; airline names gain; Calpine weakens further

By Rebecca Melvin

Princeton, N.J., Dec. 2 - Frontier Airlines Inc. priced its new 5% convertibles at the rich end of talk but nonetheless received a good reception Friday in the convertibles aftermarket, seemingly riding the shirttails of improved sentiment for the airline sector overall, several players commented.

The convertibles of AMR Corp., the parent of American Airlines, as well as Continental Airlines Inc. and ExpressJet Holdings Inc. also were higher in trade.

But Calpine Corp. convertibles dropped another 0.5 to 1 point after court order news that the troubled independent power producer must pay bondholders all of the $313 million related to asset sale proceeds.

However, the judge gave the company until Jan. 22, a month longer than holders had requested. Calpine said it plans to appeal the decision to the Supreme Court of Delaware.

"But the market is certainly telling you that a bankruptcy is imminent," a New York-based sellside desk analyst said.

Meanwhile, a convertible issue of NRG Energy Inc., another utility that has bankruptcy in its history, was mentioned in trade Friday as its shares, which have been under a little pressure of late, took back most of their Thursday gain. Nevertheless, the shares are near their highs for the year.

The NRG trades were probably related to the "shuffle" of utility holdings in light of a potential bankruptcy from Calpine, the sellsider said.

In addition, Entergy Corp., the New Orleans-based electric utility, filed with the Securities and Exchange Commission to issue up to $500 million of mandatory convertible notes (see related story).

Cheniere Energy Inc. convertibles edged higher as its underlying shares jumped 9.15% on news that a subsidiary of Chevron Corp. chose to increase its liquefield natural gas regasification capacity at Cheniere's Sabine Pass receiving terminal to 1 billion cubic feet per day.

Novell Inc.'s 0.5% convertibles added about 4 points as its underlying shares surged 10% after the Waltham, Mass.-based software company posted quarterly results that topped analysts' expectations.

The company's net loss was brought on by restructuring charges that weighed on its bottom line, but revenue rose 6.5%.

Its 0.5% convertibles traded at 92.125 versus a share price of $8.44, compared with trades at 88.7 versus a share price of $7.78 on Wednesday.

Trading activity overall remained light, as it had been for much of the week, with Friday referred to as "sleepy" by one New York-based hedge fund trader.

Frontier Airlines gains

Frontier Airline's relatively small convertibles deal of $80 million priced at par and jumped out of the gate at 103 bid, 103.5 offered. The popular issue traded actively, traders said, but moved down to 102 bid, 102.5 offered as its shares came off their highs and remained in that vicinity much of the session, before closing at 102.25 bid, 102.75 offered, according to a syndicate source. Its underlying shares closed up 2.3%.

"Frontier was a good short-term holding to play the momentum in airlines," a New York-based convertibles fund manager said.

"But it's a marginal airline with a bond at par with an unspectacular coupon," he added, touting rather the likes of the secondary market's AMR, Continental or ExpressJet convertibles, which were also higher on Friday.

Denver-based Frontier Airlines is a low-cost, regional carrier with 49 aircraft.

"How can anyone doubt the creditworthiness of CAL bonds, due in just about a year," he said.

Continental's 4.5% convertible, which wasn't seen in trade on Friday, matures Feb. 1, 2007. Its 5% convertible, which matures in 2023, was up 4 or 5 points to trade at 103, versus its share price of $16.85, which was up 4.6% on Friday.

As for why the sentiment toward airlines has improved, one convertibles player cited the ability of airline managements to cut "costs to the bones," aside from fuel prices which they can't control. Now that fuel prices have come down, there is some leverage, he said.

Another source, who was loathe to credit management for any positive sentiment, emphasized the economic climate, which included lower fuel costs, for the improvement in sentiment toward airlines.

"The economic environment is beautiful. Inflation remains low, oil prices are down, the economy is growing. The airlines are only going to have more people flying. They're getting lucky after a spell of bad luck," he said.

A third player, who said his firm had traded the new Platinum Underwriters Holdings Ltd. deal, which priced Thursday, but not Frontier on Friday, said that airlines, no matter how well they are run, are going to suffer because of the sector overall.

"It's like the autos; it's the world you live in, at the end of the day, with the current structure, all of them are going to suffer," he said.

Frontier Airlines priced its convertible debentures via Morgan Stanley as bookrunner and Citigroup Global Markets as co-manager at the rich end of talk, which was for a coupon of 5% to 5.5% with an initial conversion premium of 20% to 25%.

There is a greenshoe for $12 million. The bonds will be non-callable for five years and putable in years five, 10 and 15.

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

Cheniere bonds edge higher

Cheniere Energy shares were big movers, gaining 9.15% on the day, but the Houston-based energy company's 2.25% bonds only gained about 1.25 points after the company announced that a subsidiary of Chevron has elected to increase its reserved liquefied natural gas (LNG) regasification capacity at the Sabine Pass LNG receiving terminal to 1 billion cubic feet per day (Bcf/d).

Chevron USA, Inc. and Sabine Pass LNG LP, a wholly owned subsidiary of Cheniere, entered into Terminal Use and related agreements in November 2004 providing Chevron with an initial 700 million cubic feet per day of capacity at the terminal for 20 years commencing no later than July 2009.

The 2.25% convertibles traded at 124.75, compared with trades early in the day and on Wednesday at 123.5.

The Sabine Pass LNG receiving terminal is being constructed near Sabine Pass in Cameron Parish, La. It will be capable of receiving vessels of up to 250,000 cubic meters and is permitted for 2.6 Bcf/d of regasification capacity in its first phase. Cheniere is seeking to expand the facility's regasification capacity to 4 Bcf/d.

Calpine limps lower

Calpine's 4.75% bonds moved down about a point on Friday to 24 as its shares tumbled 30% to $0.28 after the Delaware Court of Chancery's ruling in the company's action against The Bank of New York, a trustee for Calpine's senior secured note holders, and Wilmington Trust Co., a trustee for Calpine's first-lien and second-lien noteholders.

The judge, vice chancellor Leo E. Strine, ordered Calpine to restore to the Bank of New York collateral account approximately $313 million, plus accrued interest at 3.5% per annum, by Jan. 22.

Strine's latest ruling in the case rejects Calpine's proposal to repay $199 million three months from now but gives the company a month more than the December deadline requested by Wilmington Trust and the Bank of New York.

Moody's Investors Services and S&P downgraded Calpine bonds. Moody's downgraded the senior unsecured debt to Ca from Caa3 and the ratings of several of its subsidiaries and said the outlook is negative.

Moody's said the downgrade reflects deterioration in the company's liquidity position and expectations for poor results continuing in the near term. Moody's also said the downgrade was due to its opinion that a default is likely.

S&P said it lowered its corporate credit rating on Calpine and its subsidiaries to CCC- from CCC and said the outlook remains negative.

Fitch Ratings said it assessed the 140 public power issuers it rates for any exposure to Calpine via power supply contracts or co-ownership in generating units and said it sees no material impact to the ratings of public power entities in the event Calpine files for bankruptcy protection.

Fitch noted its primary concern related to a Calpine bankruptcy is that it could result in a rejection or termination of their contracts with public power utilities, causing these utilities to replace the power with less favorable or higher priced sources.

Calpine's 6% and 7.75% convertible bonds weren't active in trade on Friday.

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