Mirant bonds on the rise; Federal-Mogul allocates DIP; Calpine bonds continue slide

By Paul Deckelman and Sara Rosenberg

New York, Nov. 23 - Mirant Corp.'s bonds were seen solidly higher Wednesday in line with Tuesday's rise in the bankrupt Atlanta-based power generating company's bank debt, although no market-moving news was seen out.

Also in the power generation sector, Calpine Corp.'s subordinated bonds and its bank debt were seen lower for a second straight session following the company's defeat in a closely-watched Delaware court case revolving around how Calpine is allowed - or not allowed - to spend proceeds from its recent sale of its natural gas assets.

And Federal-Mogul Corp. was heard by bank debt market participants to have allocated its debtor-in-possession financing facility on Wednesday. A trader quoted the $275 million term loan tranche at 101.125 bid, 101.625 offered.

That term loan is priced with an interest rate of Libor plus 200 basis points. According to the company's October court filing requesting the new DIP proposal, the term loan pricing was originally contemplated at Libor plus 250 basis points.

Federal-Mogul's $775 million DIP also contains a $500 million revolver with an interest rate of Libor plus 225 basis points and a 37.5 basis point unused fee. The revolver was not seen quoted in the secondary during market hours, the trader added.

The company announced that it obtained court approval for the transaction, which was essentially an amendment of its existing DIP, on Nov. 18. The amendment increased the size to $775 million from $500 million, extended the maturity and permitted the company to implement a U.K. settlement agreement.

The DIP's maturity was extended to the consummation of the company's plan of reorganization or Dec. 9, 2006, whichever occurs first, from its current expiration date of this Dec. 9.

Citigroup acted as the lead bank on the deal for the Southfield, Mich.-based auto parts manufacturer.

A trader in distressed bonds meantime saw Federal-Mogul's notes unchanged at 33.5 bid, 34.5 offered.

Mirant debt rises

Elsewhere in a quiet, abbreviated pre-holiday trading session in the junk bond market - which turned out the lights and locked the doors at 2 p.m. ET Wednesday, ahead of Thursday's full-day close for Thanksgiving Day and Friday's lightly attended half-session - a trader in distressed issues saw Mirant's bonds solidly higher, "up three or four points," although he had no explanation for the move.

Mirant's bonds and bank debt have recently been firmer, following the company's announcement that its second amended Chapter 11 plan of reorganization had been widely accepted by the key classes of creditors and shareholders created under that plan.

On Wednesday, the trader said, Mirant's 7.90% notes due 2009 firmed to 120 bid, 122 offered from prior levels at 117 bid, 119 offered, while its 7.40% notes, which had been scheduled to mature last year, moved up to 118 bid, 121 offered from prior levels at 116 bid, 118 offered.

Mirant's convertible issues were also seen higher, with its 2 ½% notes due 2021 three points better on the day, at 104 bid, 105 offered, and its 5 ¾% converts due 2007 improving to 115 bid, 117 offered from prior levels at 111 bid, 113 offered.

The trader also quoted the company's bank debt higher, 108 bid, up from 104 previously, although other market sources had seen the 2003 bank loan having firmed 2½ points during Tuesday's session to end at 107.5.

Mirant said on Nov. 16 that the final voting tabulation on its plan showed that over 97% of its unsecured creditors and shareholders who voted on the plan approved it. The unsecured creditors voting in favor of the plan hold more than 80% of the unsecured debt that voted.

Mirant further said that the plan was also accepted by the unsecured creditor classes of most of its debtor-subsidiaries, including Mirant Americas Generation LLC, Mirant Americas Energy Marketing, and Mirant Americas, Inc.

Mirant said that along with its plan, which will cut the company's debt load by nearly half, it has also obtained commitments for over $2.3 billion in loans to finance the business upon exit from Chapter 11. Coupled with its current cash and cash equivalents of over $1 billion and expected debt reduction, Mirant said that it could "emerge from bankruptcy with one of the strongest balance sheets in the merchant power sector."

The strongly positive vote by the shareholders and the unsecured creditors clears the way for the confirmation hearing on the plan, which is scheduled to begin Dec. 1 before the U.S. Bankruptcy Court for the Northern District of Texas.

Calpine second-line loan, sub bonds off

Elsewhere in the power-generation sphere, Calpine's second-lien term loan was heard by bank debt market participants to have dropped by about half a point in continuing reaction to the San Jose, Calif., power producer's having lost its court battle against certain note holders over the use of asset sale proceeds. On Tuesday, the Delaware Court of Chancery ruled that Calpine's use of approximately $313 million of proceeds from the sale of domestic gas assets to purchase gas storage inventory violated its second-lien notes indenture.

Furthermore, the court's vice chancellor, Leo E. Strine, Jr. ruled that future use of the proceeds for similar contracts is impermissible.

Calpine has been fighting it the use of proceeds issue with The Bank of New York, collateral trustee for the company's senior secured note holders, and Wilmington Trust Co., indenture trustee for the company's first-and second-lien notes since September.

Approximately $400 million from the sale of Calpine's domestic gas assets remains in an account at the Bank of New York.

In the wake of that devastating ruling, the company's second-lien bank debt was quoted at 75.5 bid, 76.5 offered, down from 76 bid, 77 offered. Prior to the Tuesday's court ruling, the bank debt was quoted at 77 bid, 79 offered.

In the bond market, Calpine's 8½% notes due 2008 were seen to have dropped to 38 bid, 40 offered from prior levels at 40 bid, 42 offered, while its 7¾% notes due 2009 backtracked to 36 bid, 38 offered from 38 bid, 40 offered at the close Tuesday, a trader said.

Another trader said that Calpine was "the only thing that looks like it's trading at all," and characterized it as "looking a little weaker." He quoted its 8½% notes due 2011 down three points on the session to 32.5 bid, 34.5 offered, while a little closer in its 7 5/8% notes due 2006 had slid to 58 bid, 60 offered from 61.5 bid, 63.5 offered previously.

Another trader said that Calpine "took their dip [Tuesday], and were down a little more [Wednesday]," with the 8½% 2011s at 33 bid, 35 offered.

"The 11s, and the [8½%] '08s were down two points across the board. Those are the best barometer of how Calpine trades, with the 11s definitely the benchmark."

Calpine debt starts to converge

He agreed with the observation that the bonds were starting to converge at those lower levels - usually seen by the market as a sign that with speculation about a possible bankruptcy filing somewhere ahead, the end may not be too far off.

"They're getting there, where they'll all trade on top of each other, though you still have about eight points between the '08s and the '11s."

While Calpine's unsecured debt, which is not expected to be worth very much should the company be forced into Chapter 11, was moving lower in the wake of the court ruling, its secured bonds in fact rose a point or two on Tuesday in the wake of the ruling, traders said, apparently on the assumption by the holders of those bonds that a bankruptcy filing and reorganization which would leave them in a commanding position might not be too far off.

On Wednesday, those senior secured notes held steady at those higher levels, with the 9 5/8% notes due 2014 at 103 bid, 103.5 offered, its 8½% notes due 2010 at 72.25 bid, 74.25 offered and its 9 7/8% notes at 72.5 bid, 74.5 offered.

However, Calpine's New York Stock Exchange-traded shares - which had fallen more than 20% Tuesday in the wake of the ruling - were again on the slide Wednesday, dropping another 21 cents (15.11%) to end at $1.18, on volume of 67.6 million, more than five times the norm.

"Calpine was not doing so good," one of the bond traders said, with a considerable degree of understatement. "The stock got cut by a few places [Wednesday], and they got put on negative watch by S&P. I don't know how they'll get out of this mess."

Calyon Securities, for instance, downgraded the company's shares Wednesday to neutral from buy previously, citing the impact of Tuesday's ruling.

Standard & Poor's, meanwhile, said late Tuesday that the Delaware decision "materially harms the company's weak liquidity profile," although the ratings agency did acknowledge that Calpine's "significant cash balance and its ability to generate cash from the sale of gas assets in storage should allow the company to meet the potential liquidity demands arising from the lawsuit."

However, it added that "[m]ore importantly, the court decision heightens concerns about Calpine's ability to sell or monetize assets so that management can execute its delevering plan."

S&P analyst Jeffrey Wolinsky warned that of particular concern "s the effect of the court's decision on Calpine's ability to monetize portions of the Geysers facility to meet its liquidity needs."

With such problems, the trader continued, "this company is toast, between the delayed asset sales" - Calpine, observers said, had held off on the sale of some other non-core assets pending the resolution of the Delaware case - "and their liquidity situation [since] the market is completely shut to them; they can't even do any funky preferreds anymore."

He also noted "their upside-down operations - their [quarterly] numbers stunk" - in asserting "I think they're done - but who knows?"

Subordinated bond investors were not the only ones dismayed by Tuesday's ruling. In a research note on Wednesday, CreditSights Inc. likened Calpine's situation to the children's party game of musical chairs, opining that no one "wants to be the one without a chair if the music stops, and [Tuesday's] Delaware court ruling makes that possibility much more likely."

The ruling by the Chancery court "is unlikely to be overturned on appeal," lead analyst Dot Matthews wrote. It complicates the relationship between the company's first- and second-lien bonds "and makes it much harder for cash-strapped CPN to keep going." Matthews predicted that Calpine will have difficulty returning the $313 million out of the proceeds which it has already spent on gas purchases, "and that could push the company closer to the edge" of insolvency.

The research note also said that taken in tandem with an August court ruling in Canada - in which a Nova Scotia judge directed that Calpine set aside sufficient funds from its sale earlier this year of its Saltend Energy Centre in Britain to guarantee repayment of certain bonds bought before Sept. 1, 2004 - Tuesday's ruling by Delaware court vice chancellor Leo Strine "makes creditors more likely to seek every advantage in their dealings with CPN, and new money less likely to lend."

Matthews said that CreditSights was reiterating its long-held underweight on Calpine's senior unsecured notes, and was cautioning their would-be buyers that "since bankruptcy is more likely now [Wednesday] than it was [Tuesday, i.e. before Strine's ruling], maturity and coupon are not a consideration for unsecured debt if there is a filing."

The advisory service said that investors looking at Calpine would be better off in its secured debt, notably its CalGen second- and third-lien bonds. It also cautioned that while other classes of Calpine secured debt have value, "we advise being certain of asset coverage before buying."

Owens Corning rises

Apart from Calpine, a trader saw the bonds of bankrupt Toledo, Ohio-based insulation maker Owens Corning three points better, at 80 bid, 82 offered. Bankrupt Lancaster, Pa.-based floorcovering maker Armstrong World Industries Inc. - which, like Owens Corning, is struggling with huge asbestos liability issues - was meantime up a point, its 9-handle bonds at 74 bid, 75 offered and its 6-handle notes at 72 bid, 74 offered.

Pliant 13s lower

Traders saw Pliant Corp.'s 13% subordinated notes due 2010 trading at 19 bid, 20 offered, down a point from Tuesday's levels. Those bonds are trading flat, or without their accrued interest, in the wake of the Schaumburg, Ill.-based packaging maker's disclosure in its quarterly 10-Q filing with the Securities and Exchange Commission earlier in the week that it anticipates not making the approximately $20 million interest payment due on those bonds Dec. 1. It will instead invoke the standard 30-day grace period, and will hold talks with an ad hoc committee of bondholders on an alternative solution - although it warned in its filing that a bankruptcy filing was possible if no agreement were reached.

The company's two issues of senior secured bonds, meantime, continue to trade with accrued interest, 11 1/8% senior secured notes due 2009 around 88 bid, 89 offered, and its 11 5/8% senior secureds of '09 at 110.5 bid, 111.5 offered.

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