Calpine bank debt firms on bankruptcy buzz, bonds bounce; Curative's day of reckoning

By Paul Deckelman and Sara Rosenberg

New York, Nov. 30 - Calpine Corp.'s second-lien bank debt headed higher on Wednesday, traders said, seemingly spurred on by rumors of a potential Chapter 11 filing.

Meanwhile, the troubled San Jose, Calif.-based power company's unsecured bonds - which suffered a massive meltdown Tuesday on the news of a sudden shakeup in the executive suite and the heightened chances of a restructuring - were seen to have bounced off their Tuesday closing levels, while its secured bonds, which rode out the storm, were also seen firmer.

Elsewhere, some distressed-bond players were watching Curative Health Services Inc. - whose grace period for making the Nov. 1 coupon payment on its bonds is up, meaning that the Hauppague, N.Y.-based medical products and services provider must pay up or face default, absent an agreement with its bondholders.

Calpine's second-lien bank debt was quoted at 77 bid, 78 offered, up about 1½ points from Tuesday's levels of 75½ bid, 76½ offered, a trader in the bank loan market said.

"Speculation is they will file. And, speculation is that recovery will not get any worse. No one knows for sure what the final recovery will be - but if they file for bankruptcy they will have to pay down debt," the trader explained.

Bankruptcy talk began to circulate around the market on Tuesday after the company announced that its chairman, president and chief executive officer, Peter Cartwright, and Robert D. Kelly, its executive vice president and chief financial officer were leaving. Cartwright not only held the three top positions - he was also the company's founder.

Calpine's lead director Kenneth T. Derr was named chairman of the board and acting CEO, and Eric N. Pryor, executive vice president and deputy chief financial officer, will serve as interim CFO. On Wednesday, Calpine was reported to have hired turnaround specialist AlixPartners as its restructuring advisor.

That executive shakeup roiled the bond market on Tuesday, helping to beat Calpine's unsecured bonds down into a range of around 27 to 32 - with its 2006 unsecureds falling more than 30 points to finish around 31 or 32 bid, while its longer-dated unsecured issues were seen down anywhere from 8 to 12 points to finish in the upper 20s.

But after Tuesday's massive blood-letting, on Wednesday, Calpine "came back a bit," a trader said, quoting the bonds up about a point from Tuesday's finish. "Everyone's talking about these things potentially defaulting this week, but I don't know if that's going to happen or not."

Calpine, another trader said, "actually traded up a couple [of points]," with its 7¾% notes due 2009 firming to 31.5 bid, 33.5 offered, up from 30 bid, 32 offered.

A market source at another desk saw the 10½% notes due 2006 and the 7 5/8% notes due 2006 - Tuesday's hardest-hit losers, each with a better than 30-point swoon - each up around half a point to a full point, at 34 bid and 33 bid, respectively. He also saw the company's 8 5/8% notes due 2010 a point better at 27 and the 8½% notes due 2010 1½ points better at 75.5. However, Calpine's 8½% notes due 2011 eased slightly to 26.25.

"There were a lot of Calpines trading," yet another trader said, estimating that the 101/2s were up two points to 33.5 bid, 35.5 offered, while its secured 8½% notes due 2010 were a point better at 75 bid, 76 offered.

The secured bonds "looked a little stronger," an market observer pointed out, quoting those 2010 81/2s 1½ points better at 75.5 bid and its 8¾% notes due 2013 at 75, also up 11/2.

The secured bonds may get a test Thursday, when the cash-strapped company has to come up with $19.75 million to make the coupon interest payment on its $400 million of 9 7/8% secured notes due 2011. There was no word at press time late Wednesday as to whether the company would make the payment or not.

Meanwhile Calpine's 4.75% and 6% convertible bonds continued to trade actively on Wednesday, with the 6% slipping to 18 and closing out at 18.5 bid, 19 offered, compared to trades on Tuesday at 23 bid, 24 offered.

The 4.75% bonds, which were more actively traded on Tuesday, were seen going out at 24.25 bid, 24.75 offered, in the range at which they traded Tuesday, but higher than their close, which was put at 22.75 bid, 23.75 offered by one firm.

"The old management fought so hard to keep the company afloat. They did not throw in the towel. So it certainly makes sense that bankruptcy is more likely now that they are gone," a buyside analyst said.

"There's the concept of the 'zone of insolvency,' which has to do with a point at which management's fiduciary responsibility switches from equity to the creditors," he said.

The Calpine 7.75% convertibles were quoted at 13, but weren't seen in trade.

Mirant bonds keep rising

In that same power generation sphere, Mirant Corp.'s recently strong bonds were seen continuing to firm, with a market source quoting the bankrupt Atlanta-based merchant energy company's 7.90% notes due 2009 as having gotten as good as 123 bid, up from 121.5 on Tuesday, while its 7.40% notes that were to have come due last year were unchanged at 119 bid.

However, another bond trader saw those bonds unchanged, at 121 bid, 123 offered, and 120 bid, 122 offered, respectively.

He did see a rise in the company's convertible issues, with its 2½% notes due 2021 at 105 bid, 107 offered, and its 5¾% converts due 2007 at 116 bid, 118 offered, each up a point.

At another desk, those Mirant converts were seen having traded in opposite directions, with the 21/2s quoted up a couple of points to 105 in active dealings due to the fact that the paper is close to being convertible.

"You've got every equity fund out there buying them because they are going to be convertible into stock, and it's the cheapest way to get stock," a Connecticut-based sellside trader said.

The 53/4s meantime were seen having traded down a point or so to 116.5 bid, 117 offered. Mirant shares, which trade over the counter, gained three cents, or 2.56%, to $1.20.

While the bonds and converts, as well as the bank debt, have recently risen after the company's unsecured creditors and its shareholders nearly unanimously okayed Mirant's latest plan of reorganization, clearing the way for a confirmation hearing that starts Thursday in Houston, there's been some talk that Mirant's debt might be getting a boost from Calpine's current situation.

Although trading of the Mirant convertibles was said to be not directly related to the Calpine activity, the two issuers share some interesting parallels.

After Mirant filed for bankruptcy court protection two years ago, its convertible bonds took a big hit, but later they recovered and recently have been trading around par.

"Mirant was a good comp [for Calpine] a couple of years ago. But then Mirant entered bankruptcy because it didn't have efficient plants. But those older, coal plants turned out to have more value than people realized," a buyside analyst said.

"A lot of things can change. Those bonds went back up to par," the analyst said.

Curative's coupon

Apart from the power grid, a bond trader noted that Curative Health's 10 ¾% senior notes due 2011 may be the object of market scrutiny on Thursday.

"They went into their grace period at the end of October" on the Nov. 1 coupon payment on those bonds, and began talking with an ad hoc bondholders' committee. "Now the grace period is up, and Nov. 30 they have to make their coupon payment, or they're in default."

He saw the bonds - which earlier this year were trading above par - at bid levels around 70-70.25 on Wednesday.

Will they make it or not? His diagnosis is negative. "That thing is clearly over. My guess is that's going to be a restructuring."

He said the company "was trying to get the large bondholders to agree to take equity - but you look at the equity [which now trades on the Nasdaq at 65 cents per share], it's an $8 million market capitalization, versus $185 million of bonds. It's ridiculous.

"You might as well give them Monopoly money."

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