Dynegy, Calpine surge; Adelphia higher; Air Canada strengthens on buyout talks

By Carlise Newman

Chicago, April 3 - Dynegy Inc. sparked a continuing surge in energy names Thursday after the company announced $1.66 billion in new financing Wednesday. The energy sector, which had been firming up in recent days, continued its ascent, with Calpine Corp. and AES Energy riding the wave. Likewise for telecommunications company Adelphia Communications Corp., which continued to firm in response to news from Charter Communications, Inc., which announced a rise in revenues and cash on hand to pay off its debt on Tuesday.

Air Canada Inc., which filed for bankruptcy Tuesday, was seen rising cautiously after news that Texas Pacific Group, which specializes in buying distressed companies, may be interested in the company.

Various deadlines loom for several companies Friday, but did not seem to pressure the companies' debt. The day brings Kmart Corp.'s voting and objection hearing; Armstrong World Industries' hearing on its amended disclosure statement and reorganization plan; Service Merchandise's hearing on its disclosure statement; and Hayes-Lemmerz International Inc.'s voting deadline on its reorganization plan.

Dynegy bonds soared again Thursday. The company said on Wednesday its Dynegy Holdings unit secured $1.66 billion in new financing. The Houston-based power company said the $1.6 billion facility consists of a $1.1 billion secured revolving credit facility that matures on Feb. 15, 2005; a $200 million secured term loan that also matures on Feb. 15, 2005; and a $360 million secured term loan that matures on Dec. 15, 2005.

The new facility replaces Dynegy Holdings' existing $900 million and $400 million revolving credit facilities that were scheduled to mature on April 28 and May 27, respectively, and a $360 million communications lease, which was scheduled to mature in December 2005.

The new facility, which requires no scheduled amortization of principal, will provide funding for the ongoing collateral needs of existing businesses and for general corporate purposes.

"Dynegy's been unstoppable," said a distressed debt trader. He quoted the Houston-based energy company's 8¾% notes due 2012 at 80 bid/81 offered, up "a good two or three points" from Wednesday, when they were seen at 77 bid/78 offered.

The news from Dynegy, as well as financing news from Reliant Resources Inc., had a lasting effect on the rest of the energy sector, described as "hot" in recent days, although Thursday's action was a little more muted.

Houston-based energy provider Reliant announced a $6.2 billion financing package on Tuesday, replacing the company's $2.9 billion Orion acquisition bridge loan, an $800 million revolving credit facility that was converted to a term loan, an $800 million revolving credit facility and construction agency agreements totaling $1.4 billion. The package is split between a $2.1 billion revolving credit facility and $3.8 billion in term loans, which mature in 2007.

Calpine's 7 3/8% notes due 2008 were seen rising "one to two" points to 63 bid/65 offered Thursday, compared to Wednesday's closing price of 61.5 bid/62.5 offered. The company's 8½% notes due 2011 were "in the low 60s."

Cable names also continued to push forward. Adelphia Communications Inc.'s bank debt was seen trading a point higher after rising steadily this week. The company's old Century term loan was quoted at 76 bid/76 offered, while the new Century loan was quoted at 73 bid/74 offered.

"Adelphia continues to get stronger every day," said a distressed trader, citing Charter Communications' earnings report earlier in the week as the catalyst. But in addition to that, he said, "people are getting more comfortable with the idea that there won't be another bankruptcy. It alleviates the pressure on Adelphia. People are more positive about it."

Charter reported its fourth-quarter earnings on Wednesday and said that its net loss widened to $1.87 billion from $303 million. But the company reported revenues rising 13% to $1.2 billion from restated revenue a year ago of $1.1 million. In addition the company said it had $450 million in cash to make coupon payments and would still have enough to fund operations.

Air Canada was seen rising two points Thursday after a significant drop on Wednesday. News has been rampant about the company after it filed for Canada's version of bankruptcy on Tuesday.

In addition, Canadian transport minister David Collenette voiced opposition on Thursday to raising the foreign ownership limit, now at 25%, on Air Canada.

The discussion arose after a U.S. private entity with experience in troubled carriers, Texas Pacific Group, said it is in preliminary discussions with Air Canada on making an investment but said the 25% foreign limit on voting shares might present an obstacle.

Texas Pacific took control of Continental Airlines in the early 1990s after that carrier filed for bankruptcy twice. It has also sought involvement with US Airways and UAL Corp.

A distressed trader quoted Air Canada's 10.25% notes bid at 24 and offered at 27. On Wednesday the notes had been 22 bid/24 offered.

Air Canada's bankruptcy protection will last until May 1.

Kmart Corp. faces a voting and objection deadline on its reorganization plan Friday, but distressed debt traders said they had no doubts the company's plan would pass. Kmart's 9 3/8% notes due 2006 were seen bid at 17.5, little changed on the session, but off from recent bid levels around 18.

Hayes-Lemmerz International Inc. also faces a deadline Friday for votes on its reorganization plan. The company's bank debt had been trading in the "high 70s" for most of the week and strengthened to the "low 80s" on Thursday.

In the convertible market there was some optimism shining through on the HealthSouth Corp. front too or news that was being interpreted positively by some onlookers.

"From what I understand, there is a line of thought that once all the existing [HealthSouth] management is wiped out - they are dropping like flies, with all the guilty pleas - then there's a chance a white knight might step in and rescue this company," said a convertible trader at one of the bulge-bracket firms.

"They have some assets and a business model that should be doable, if managed correctly. A bankruptcy could still be inevitable, though."

CreditSights analysts Pearl Chang and Roger King have said the HealthSouth 3.25% converts are "worthless" in a bankruptcy scenario along with the 10.75% subordinated notes. They estimate senior noteholders would get just 30 cents on the dollar.

In what they admit is a hazard guesstimate, the credit analysts put a $2.8 billion base case value on HealthSouth's assets and a base starting point for EBITDA after minority interest in the $600 million range.

Five HealthSouth employees pleaded guilty Thursday to charges stemming from the massive $2.2 billion accounting fraud - $1.4 billion in overstated earnings and $800 million in inflated assets - alleged by federal investigators. At least three top executives, including recent and former chief financial officers of the company, have already pleaded guilty.

Attorneys for former chief executive Richard Scrushy, who was fired after he was charged in the case, filed court documents Thursday to be removed from his case and that was taken as a bad sign but generally just on a sensational level with little relevance to the company's prospects going forward.

"There is a lot of speculation going on right now," said a distressed trader, referring to HealthSouth's situation.

"You could hit a home run [with the converts]. But if you pick them up, even at 13 or 14, and it goes into default, you lose a lot of money, albeit not as much as if you bought them a month ago."

HealthSouth's convert was trading just 1-2 points below par on March 19 when the scandal broke - less than two weeks from the April 1 maturity date on the converts. While not yet in default, as there is a 10-day grace period, payment on the roughly $350 million converts outstanding has been blocked by HealthSouth's bank group.

(Ronda Fears contributed to this report.)

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