Refco adds 2 points to 54/56; Solo, Pliant crushed; Calpine off on credibility; airlines steady

By Ronda Fears

Nashville, Oct. 19 - Refco, Inc. continued to monopolize the distressed debt market, but traders said volume in the bonds declined significantly as the futures and commodities broker made its first appearance in bankruptcy court, where it also filed a new assets and liabilities statement with sharply lower figures.

In bankruptcy court Wednesday in New York, Refco made a new bankruptcy filing showing total assets of $16.5 billion through the end of August - a sharp reduction from the $48.8 billion as of Feb. 28 listed in its initial petition filed on Monday. Liabilities were also cut to $16.8 million in the new filing from $48.6 billion listed earlier in the week.

The new filing gave no explanation for the change in the figures, and it made bondholders considerably apprehensive.

"There are a lot of moving parts. The balance sheet is still being scrutinized," said a source at a high-yield and distressed debt boutique. "It's going to be hard to connect the headlines to where those bonds are."

Refco Finance's 9% bonds due 2012 went home for the day at 54 bid, 56 offered - about where they had traded throughout the session and up about 1 point from Tuesday. Early on Wednesday, the bank debt was said to be holding its own at 91 bid, 93 offered.

"People seem to have a range," said another distressed debt market source. "I've heard everything from 55 to 75 cents on the dollar is the ultimate workout, but there are still some moving parts. Every time there is news, everybody tweaks their own recovery model, which moves the market up and down."

Refco asset sale key point

The source at the sellside boutique in Connecticut said the matter of Refco selling its futures unit - the bulk of its business - was an important factor in the market ratcheting down Refco Finance bonds on Tuesday from the low 60s neighborhood.

"At first the market thought they were just selling 80% of the business so the bids were based on a 0.8% [valuation of Refco assets]," he said. "It turns out they are selling 100% of the company, with an option to keep 20%" so everything had to be adjusted downward from there.

In conjunction with its bankruptcy filing Monday, Refco said it had struck a deal to sell its key futures brokerage business - conducted through Refco LLC, Refco Overseas Ltd., Refco Singapore Ltd. and certain related subsidiaries - to an investor group that includes J.C. Flowers & Co. LLC, The Enstar Group, Inc., Silver Point Capital, MatlinPatterson Global Advisers LLC and Texas Pacific Group.

The proposed purchase price of $768 million equals 103% of the net capital of the acquired businesses, Refco said on Monday, but added that it would have the option to retain up to 20% of the equity value of the entities being sold.

"There are a lot of bidders for the futures business," the source at the boutique said, whereas interest in the other Refco units is questionable.

Refco IPO litigation inevitable

The biggest question, he said, is whether the Refco Finance bonds will ultimately be made whole, which will cause a ripple effect among stockholders.

In any event, onlookers and players in the Refco story almost universally expect there will be lawsuits flying over the Refco initial public offering just about six weeks before the scandal erupted and led to the bankruptcy filing.

Refco shares have been frozen at $7.90 since last Thursday when trading was halted on news that turned out to be the indictment of former CEO Phillip Bennett, who has pleaded not guilty to charges that he hid bad loans and made false statements during the IPO roadshow. The stock had IPO'd at $22 a share via bookrunner Goldman Sachs & Co., which is an adviser to Refco in the bankruptcy reorganization.

"There are a lot of deep pockets to sue," the sellsider said. "Litigation is a big factor in this. It will be very dicey."

Stockholders, many of which are hedge funds, are already lining up, according to another market source.

"The obvious speculation is that they [Refco IPO players] will be demanding rescission of those orders. In other words, they will want those shares repurchased at their original IPO price, $22," she said. "But, who is going to pay for that will be the contention point."

Solo Cup, Pliant trade down

Packaging names - Solo Cup Co. and Pliant Corp. - were crushed Wednesday on concerns about rising raw material costs and the inability to pass that on, traders said.

Solo's 8.5% bonds due 2009 shed 1 to 2 points to 82 bid, 83 offered while Pliant bonds were described as being off 6 or 7 points on the day with the 13% bonds due 2010 at 22 bid, 24 offered and the zero-coupon bonds due 2013 at 15 bid, 17 offered.

One trader said he saw the Solo bonds going out Wednesday at 81.50 bid, 82.50 offered, however. He noted the bonds had dropped to the 75/76 context around a week ago, when the market was at its weakest, then bounced back to the 82/83 area when they got covenant waivers.

"But [Solo] is heavily leveraged, and the company continues to languish because of its inability to pass its [raw material] price increases along to customers," the trader said. "That's eventually going to catch up with these guys."

Calpine credibility a concern

Calpine Corp. said it was working with the Kirkland & Ellis law firm in a legal battle with noteholder trustees Bank of New York Co. Inc. and Wilmington Trust, rather than preparations to head off to bankruptcy court. But the market remains skeptical of the San Jose, Calif.-based independent power producer, and bankruptcy "jitters" sent its securities tumbling again Wednesday.

On average, the Calpine paper fell about 4 points Wednesday to the 55 area, one trader said. Another pegged Calpine's 8½% bonds due 2008 finishing the day at 55.5 bid, 56.5 offered, off from a 58.25 bid in the morning and off 3.75 points on the day.

The latter trader also mused that Calpine could be in the market to take advantage of the price decline to buy back some debt cheaply.

"They're probably buying back bonds again, like they always do. Every time the bonds slump they come in and buy some," the sellside trader said.

Otherwise and besides, he added, Calpine still has huge credibility problems with the market.

"While they probably hired Kirkland & Ellis to help them with that lawsuit, there are probably other angles," the trader continued. "They have sold so many assets, and they have all of that second-lien paper, people may be wondering how many options this company has left if their business model is upside down."

Airline paper steady, firm

Airline paper was described as "OK" on Wednesday amid earnings and equity sales among some of the legacy carriers.

Bankrupt Northwest Airlines Corp. bonds were seen at 28.5 bid, 29.50 offered, up about a ½ point.

Fellow bankrupt carrier Delta Air Lines Inc. bonds were said to be "hanging in" at the 18 bid, 19 offered context.

While AMR Corp., parent to American Airlines Inc., posted what one trader referred to as "horrible" numbers, some players in Continental Airlines Inc. were cautiously optimistic with its spot sale of 18 million shares at $11.35 - discounted from Tuesday's closing at $11.89.

Continental said the estimated $204 million in proceeds would help toward its approaching cash crunch in 2007 and beyond as its struggles with low ticket sales and high costs. Also Tuesday, the No. 5 U.S. airline posted a third-quarter profit of $61 million, or 80 cents per share, despite its fuel bill rising sharply to $684 million.

But the airline warned that it expects to post a "significant loss" in fourth quarter and for 2005. Continental ended the quarter with nearly $2 billion in cash and said it expects to have enough liquidity to get through 2006. But in a filing with the Securities and Exchange Commission, the company noted "significant financial obligations due in 2007 and thereafter" and "inadequate liquidity to meet those obligations" unless business conditions changed dramatically. It made the same acknowledgements in July.

"It seems like a smart move," said a buyside market source, referring to Continental's spot stock sale. It suggests they are serious about addressing bond maturities coming up in 2006 and 2007."

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