Calpine bonds mixed, as takeover buzz boosts stock; Remy bonds skid lower

By Paul Deckelman

New York, Nov. 15 - Calpine Corp. bonds were seen mixed in Tuesday's dealings as investors nervously speculated about the outcome of the company's ongoing court battle over the use of its asset-sale proceeds - quite the opposite of its shares, which pushed up solidly in afternoon trading on a heady combination of short covering and a rumor - as yet unfounded and unconfirmed - that a large European utility company was getting set to make an acquisition of the San Jose, Calif.-based power generating company.

Elsewhere, Remy International Inc.'s bonds were beaten down in the wake of negative third-quarter numbers and a Standard & Poor's downgrade of the Anderson, Ind.-based maker of automotive starters and alternators.

It was the standout loser in an automotive sector that continues to spin its wheels as bankruptcy talk circulated about its largest player, the once mighty General Motors Corp. - even though the world's largest carmaker stoutly insists that it has no plans to seek court protection from the holders of its $276 billion of bonds and other debt (much of it issued by its General Motors Acceptance Corp. financing arm) and other creditors.

Calpine - whose bonds had retreated on Monday about investor nervousness about the possible outcome of the court case now being heard at the Delaware Chancery Court in Wilmington, Del. - "stopped going down," a trader said, calling the bonds "pretty much unchanged."

He quoted the company's 8½% notes due 2008 at 48, and said he "didn't see as much [activity] today as there was on Monday."

At another desk, some of the company's issues were seen up, such as the 7¾% notes due 2009, which gained two points to 42, or the 8 5/8% notes due 2010, up a point at 38, while others were slightly lower, like the 8¾% notes due 2013, seen down a point at 69.5 bid, or the 8½% notes due 2010 and 9 7/8% notes due 2011, each down half a point to 70 bid. The company's 9 5/8% notes due 2014 were unchanged at 101.5.

Yet another trader, though saw the company's bonds stronger, quoting the 7 5/8% notes due 2006 at 67 bid, 69 offered, while its 8½% notes due 2011 were a point better, he said, at 39.5 bid, 40.5 offered, "about a point stronger," with "the short end up two points," although he allowed that "there was not much [activity] there."

He attributed at least some of the rise to a rumor making the rounds of investment-oriented internet bulletin boards that Portugese power operator EDP - Electricidade de Portugal SA - intends to make an offer for Calpine in the $2.75 per share area, after notifying market regulators in Lisbon, and that offer could go as high as $3.15 per share. The trader opined, though, that "it doesn't look like there's much validity to that right now."

A spokesman for Calpine told Prospect News on Tuesday night that although he had been queried by an analyst about that same rumor, "as far as we know, there's nothing. We aren't doing anything with them. It's just a rumor. I don't think there's any validity to it."

On the message boards, while Calpine bulls waxed ecstatic about the possibility of a buyout, skeptics scoffed that it sounded like a lot of hot air to them, and suggested someone was planting disinformation as part of a pump-and-dump scheme. No legitimate real-time news service had picked up the story as of Tuesday night - only several other market bulletin boards, including one Portuguese site, that said EDP would make an offer for "International Calpine."

But the rumor probably did help to spur trading in the company's New York Stock Exchange-traded stock, which jumped 16 cents - 10% - to $1.76, on volume of about 22 million shares, twice the norm.

Another explanation might be short-covering, with some Calpine boosters apparently optimistic about the chances for a positive outcome for the company's legal battle with Bank of New York over the use of about $737 million of embargoed asset-sale proceeds Calpine garnered from the sale of its natural gas reserves in September. Lawyers for the two sides submitted legal briefs Tuesday to the Wilmington court's vice chancellor, Leo Strine, who will hear further oral arguments on the case Thursday.

BNY is the collateral trustee for several series of Calpine bonds, and several disgruntled bondholders, angered that Calpine had used $313 million of the $1.05 billion total proceeds to buy natural gas for its plants, contended that this was an improper use of the proceeds - claiming that Calpine was supposed to use the proceeds to buy back debt. They directed BNY to demand repayment of the $313 million and to freeze the remaining $737 million. Calpine in turn argues that its use of the money was proper, constituting an "investment" in natural gas under terms of the bonds, and seeks access to the rest of the money.

The case is being closely watched because of its possible impact on other Calpine asset sales as part of its efforts to cut its debt load by $3 billion.

Tembec drops ahead of earnings

Elsewhere, a trader saw Tembec Industries' 8 5/8% notes at 65 bid, 65.5 offered, which he called down five points on the day, noting that the struggling Canadian forest products company is scheduled to release earnings on Thursday and predicting that they would not be favorable.

At another desk, however, the Tembec 8½% notes due 2011 were seen just half a point lower around 60 bid.

Adelphia down

A trader in distressed bonds quoted Adelphia Communications Corp.'s 10¼% notes due 2011 down a point or two at 63 bid, 65 offered, while its 9 7/8% notes due 2007 were down about two points at 61 bid.

The bankrupt Greenwood Village, Colo.-based cable operator filed a revised draft fourth amended plan of reorganization on Tuesday with the U.S. Bankruptcy Court for the Southern District of New York. The court is scheduled to continue ongoing hearings on the company's disclosure statement on Wednesday.

Remy plummets

In the troubled automotive sector, Remy International's bonds, which already were headed downward on Monday, continued their slide on Tuesday, with a trader quoting its 9 3/8% notes due 2012 having tumbled to 22 - down from 30 on Monday, and "down from around 50 just three weeks ago, and from 60 and change a month-and-a-half ago.

"What a disaster."

At another desk - where the 9 3/8s were seen at that same 22 level, down eight points on the day - the company's 8 5/8% notes due 2007 were quoted at 72 bid, down from 78, while its 8.15% notes due 2009 and 11% '09 notes were seen down more modestly, off about 1½ points in each case, to 92.5 bid and 29 bid, respectively.

"The slide in Remy, the first trader said, is "more than just the [weakness of the auto] sector." He noted that the company had filed its 10-Q report with the SEC on Monday, and "obviously, it must have been pretty ugly - they're doing worse than everybody else in the sector."

Remy reported that in the third quarter ended Sept. 30, it swung to a net loss of $27.978 million from a profit of $37.563 million a year earlier, despite a jump in sales to $315 million from $254 million a year earlier. Much higher raw materials costs, as well as increased taxes, interest expense, restructuring costs and selling, general and administrative expenses combined to push the company deep into the red.

On the heels of those quarterly numbers, S&P cut Remy's ratings, dropping the corporate credit rating to CCC+ from B-, lowering its second-priority senior secured floating-rate notes to CCC from CCC+ and cutting its senior subordinated notes to CCC- from CCC, with a negative outlook all around.

The ratings agency said the downgrade reflects Remy's downward EBITDA trend, illustrated by its much weaker-than-expected $11.5 million third-quarter EBITDA. It warned that Remy's EBITDA for 2005, which the company estimates will be about $60, will fall "meaningfully below prior estimates and be insufficient to cover interest expense." S&P further said that the ratings also reflect Remy's "very aggressive" leverage, with some $710 million of balance sheet debt as of the quarter's end, and its "vulnerable" business profile, characterized by its exposure to the cyclical and highly competitive automotive and commercial vehicle end markets and its relatively narrow product line.

Remy's biggest customer - and former corporate parent - GM - continued to struggle Tuesday.

A trader said its bonds were "like a roller coaster," particularly its GMAC 8% notes due 2031, which on Monday had traded below par for the first time in recent memory. He saw those bonds having wound up on Monday at around 98 bid, then, saw them opening Tuesday "up about two points off those lows," at par bid, 101 offered.

However, later in the day, the bonds gave back all of their early gains and then some, to close at 97.5 bid, 98.5 offered, essentially unchanged to down a little.

At the same time, he saw GM's corporate benchmark bonds, the 8 3/8% notes due 2033, finishing at 67 bid, 68 offered, down half a point.

A second trader also pegged the GM bonds lower on the day, in line with the company's faltering New York Stock Exchange shares fell by as much as $1.23 to an intra-day low of $22.51 - their lowest point in 23 years - before closing down $1.13 (4.76%) at $22.61, on volume of 15.5 million, about 1½ times the usual turnover.

With that somber example in the equities market, "there doesn't seem to be much bid for the bonds either," he said. "There's tons of odd lots for sale, that just keep coming out cheaper and cheaper."

He called the 8 3/8s "pretty active," seeing them close at that same 67 bid, 68 offered level as the first trader.

At another desk, a market source saw those 8 3/8s actually up a point, at 68 bid, but said that GM's 7 1/8% notes due 2013 retreated to 69.75 bid from 71 on Monday, with most of the deterioration having taken place late in the day.

The GM bonds and shares have been pushed down as the company has recently been a renewed target of speculation about what was once unthinkable - that the world's largest automaker could go bankrupt.

On Monday, a Wall Street Journal story about what GM could do to get itself out of the doldrums suggested a bankruptcy filing now, rather than later, and also recommended that GM jettison current chief executive officer Rick Wagoner, contending that the ailing automotive giant is "suffering death by a thousand cuts under Wagoner's so-called recovery program . . ."

GM has said several times that it has ample cash - a cushion of about $19 billion - and absolutely no plans to follow former subsidiary Delphi into Chapter 11. But that's not the view of players in the credit default swaps market, where GM is being likened in some quarters to its now-bankrupt problem child. The prices that GM debt investors are paying to protect against a default having risen sharply recently, and those debt investors are now forced to pay much of the money up front - just the way Delphi CDS protection buyers were before the parts maker went belly-up last month. A holder of GM's five-year corporate debt can now expect to be charged as much as $12 annually per $100 of protected debt - or $120 on the standard $1,000 corporate bond - for a hedge against default, well up from the $8 or $9 per $100 range just a few weeks ago.

The once-mighty GM has lost nearly $4 billion so far this year, $1.6 billion of that in the recently concluded third-quarter alone, with most of the red-ink due to escalating costs for steel, petroleum-based plastics and other raw materials, as well as the burgeoning healthcare costs the company pays for its approximately 750,000 hourly workers, retirees and related dependents.

On top of those problems, and a sharp slide in sales, GM last week announced that it would have to re-state its 2001 earnings, which were overstated by between $300 million and $400 million due to accounting errors, which the Securities and Exchange Commission is now looking into.

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