Calpine drops sharply after junk bond deal goes sour; BankUnited prices $100 million

By Ronda Fears

Nashville, Feb. 23 - It was a choppy session for convertible players as stocks weakened, albeit slightly. Although it was quiet in Convert Land for most of the morning, dealers began to see buyers emerge on the weakness in the underlying stocks around midday.

Calpine Corp. hogged a disproportionate share of activity in convertibles throughout the session because, in Junk Land, a Calpine generating unit scrapped a troubled $1 billion new deal, and that sent the Calpine convertibles tumbling after having run up on the refinancing deal.

The convertible bonds dropped 6 points outright while the two convertible preferreds each fell about 1 point; the stock and straight bonds also plunged.

Part of the hesitancy of convertible players to take a position during the market's downdraft was waiting on credit spreads to widen a bit, traders said. "That [widening] began in notable fashion" Tuesday, one trader said, and cheapened a good portion of the convertible market - particularly high-grade issues - which had been continuing to richen since the first of the year.

Neal Jordon, strategist for investment-grade bonds at Banc of America Securities, said in a report Tuesday that there was some spread recovery in high-grade bonds but said the "recent softness in the investment-grade market has not gotten the support from the high-yield market that it has been able to count on recently, as high-yield performance has been weak, as well. Other factors potentially keeping spreads at wider levels include softness in equity markets, an uptick in VIX and recent Treasury volatility."

That could explain some activity in high-yield converts, as well. One trader particularly noted that the credit default swaps for El Paso Corp. widened Tuesday.

Many convertible players are hoping for a spike in volatility but that hasn't made any huge showing so far, as the VIX is still lingering around the 16% mark. More players have been betting on a bullish stock market.

For the most part, hedged players say they are weathering the downdraft, so far, without much pain. Merrill Lynch & Co. reported that last week its hedge fund index was flat but year-to-date up a little more than 1%.

Outright players taking a strategy aimed at picking growth stocks, and the corresponding convertibles with low conversion premiums are "taking it on the chin," as one observing trader said.

At the beginning of the year, on the heels of the strong comeback for stocks in 2003, outright and hedged convertible players alike were franticly searching for delta in order to participate in the bull stock market or, in the case of the hedgies, as insulation against any downdrafts.

Calpine junks deal, for now

Calpine cancelled its $2.3 billion financing efforts in the high-yield bond and bank loan markets, "due to current market conditions," and the convertible market reacted strongly. The offerings were intended to refinance debt of Calpine's power generating unit.

"Calpine was all over the place," said a convert trader at a high-yield boutique.

Calpine's 4.25% convertible lost about 6 points outright, or about 1 point on swap, to finish Tuesday's session at about 110. The issue was quoted at 109.75 bid, 110.25 offered with the underlying stock at $5.31. Calpine shares closed down 42 cents, or 7.33%, to $5.31.

The Calpine convertible preferreds each fell about 1 point, and the straight debt as well as Calpine bank paper also were sharply lower.

The trader said, though, that there seemed to be more optimism regarding Calpine's refinancing effort.

"At the end of the day, it seems people think they will get this financing done, down the road," the trader said. The trader noted that it is not altogether unusual for deals to be canceled and then revived later when market conditions are more favorable to the issuer.

Calpine appeared to be confident, too.

"The company is evaluating different financing alternatives and remains confident that it will be able to refinance this indebtedness prior to its maturity," Calpine said a statement.

BankUnited prices, MGI emerges

In the primary market, one more deal emerged after the close, while another priced before the session started.

Before the open, BankUnited Financial Corp. sold $100 million of 30-year convertible notes to yield 3.125% with a 42% initial conversion premium - at the cheap end of price talk of 2.625% to 3.125%, up 42% to 48%.

There was good execution on the deal, a capital markets source said, confirming the indication that it went well by the greenshoe on the offering getting boosted from $15 million to $20 million.

Bear Stearns & Co. Inc., bookrunner on the BankUnited deal, closed the new issue at 100.5, while BankUnited shares lost $1.07, or 3.99%, to $25.73.

After the market close, MGI Pharma Inc. launched $200 million in proceeds of 20-year discount cash-to-zero convertible notes with guidance for a yield to maturity of 2.0% to 2.5% and a 30% to 35% initial conversion premium.

A management call is scheduled for 10:30 a.m. ET, and pricing is scheduled for after Wednesday's close.

Interest payments on the MGI Pharma deal will be collateralized for three years, which buyside sources said should help it sell. There was no gray market activity in the name late Tuesday, though.

MGI Pharma shares closed Tuesday up 27 cents, or 0.55%, to $49.92, and once the new deal emerged the stock dropped $1.16, or 2.35% in after-hours trading.

Another new issue from American Axle & Manufacturing Holdings Inc. dropped slightly, a trader said, in reaction to some market chatter that the company appears to have lost a shot at a Volkswagen contract. The new 2% convertible due 2011 lost 0.625 point to 101 bid, 101.5 offered while the stock fell 82 cents, or 2.11%, to $37.99.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.