Refco bonds slide on news of post-filing breaches; Calpine loans, bonds off amid talks

By Paul Deckelman and Sara Rosenberg

New York, Dec. 8 - Refco Inc. bonds were seen sharply lower Thursday after the bankrupt New York-based financial services company was reported to have admitted that some time after its Chapter 11 filing it transferred securities from customer accounts in one subsidiary to another and later sold most of the securities involved - breaking an agreement to bar such transactions.

Elsewhere, Calpine Corp.'s second-lien bank debt was lower by about two points and its junk bonds were likewise seen lower as the company continued to engage in legal wrangling with secured noteholders as it attempted to ward off any acceleration of debt payments, which could potentially lead to a Chapter 11 filing becoming a necessity.

A trader saw Refco's 9% notes due 2012 having plunged to 71 bid, 73 offered from prior highs around 77 bid, 79 offered. He cited the disclosure about the improper securities transfer, and the further damage it does to Refco's already shaky reputation as a credible company.

"It looks like they're not going by the rules," he said. "That's how people base valuations - [on the assumption that] that they're going to do things properly."

At another shop, a trader saw those 9% notes fall to 72 bid, 73.5 offered, well down from Wednesday's finish at 77 bid,

Yet another trader said the Refco notes were "all over the place," bouncing around at mostly lower levels before ending at 72 bid, 74 offered. He had seen the bonds going out on Wednesday at 75 bid, 77 offered.

He said that he had seen some "really low-ball bids" at 70 bid, 72 offered.

After the news hit the tapes in early afternoon [ET], the bonds moved down to that 72 bid, 74 offered level, "although there were some lower bids out there. They were just throwing out low bids, to see if they could get something."

Refco - which filed for Chapter 11 protection on Oct. 17 - was reported to have transferred $170 million in securities from customer accounts in one subsidiary to another after that filing, and allegedly later sold more than 68% of the securities, even though it had previously agreed not to do so.

A lawyer representing the company said Refco Capital Markets Ltd. shifted the securities to Refco Securities LLC some time after the bankruptcy filing, with the latter entity eventually selling $117 million worth of the securities and holding the proceeds in its accounts. The company had previously agreed not to make any such transfers from Refco Capital Markets.

A lawyer representing Refco's unsecured creditors called that action a violation of the bankruptcy code and called on Refco to immediately return those funds to Refco Capital Markets.

Calpine lower

Calpine is another company lately coping with controversy over mis-allocated financial resources and demands that such funds be restored.

Its second second-lien debt was quoted Thursday at 74 bid, 75 offered by the end of the session, but had moved to as low as 73½ bid in the morning hours, according to a trader. By comparison, the bank debt was being quoted at 76 bid, 77 offered at the close Wednesday and at 78 bid, 80 offered on Tuesday.

Calpine's 8½% notes due 2008 were seen by a market source to have dipped to 24.5 bid from prior levels around 25, while its 8¾% notes due 2007 were seen down a full point to 33.

A trader at another shop characterized Calpine's bonds as "down once again" and quoted its 7¾% notes due 2009 as having backtracked a point to 31 bid, 33 offered, and saw its 7 5/8% notes due 2006 at 32 bid, 34 offered, down from Wednesday's close at 35 bid, 37 offered.

Yet another trader saw the company's two 2006 issues, the 10½% notes and the 7 5/8% notes, each having fallen to 32.5 bid, 34 offered, from prior levels at 34 bid, 36 offered. He quoted the 8½% notes due 2011 at 19 bid, 20 offered, down from 20.5 bid, 21.5 offered, while the 2008 81/2s were likewise down 1½ points at 23.5 bid, 24.5 offered.

He noted that all of those quotes came before headlines flashed across screens late in the day indicating that Calpine had reached a truce with Wilmington Trust and a committee of second-lien bondholders, who agreed not to accelerate the bonds and demand immediate payment.

"I haven't seen any trading since the news, which will probably be positive for tomorrow's [Friday's] trading," he said.

"The news will likely have an impact tomorrow [Friday]," another trader said. Prior to the news, he saw Calpine's 8½% notes due 2008 unchanged at 24 bid, 25 offered, while its 9 7/8% notes due 2011, a secured issue, half a point lower at 74.25 bid, 75.5 offered. He also saw its secured 9 5/8% notes due 2014 actually up ¼ point on the session at 102.25 bid, 103.25 offered.

Calpine and Wilmington Trust have been at odds over the latter's demand that the power company immediately repay $311.8 million of improperly spent asset-sale proceeds money, plus interest, or face a notice of default on the company's approximately $3 billion of second-lien debt.

Calpine spent that amount of the proceeds from its $1.05 billion summer sale of its natural gas reserves to buy gas for its power plants in early September, a use of funds which Calpine contended was a permissible "investment" under its various debt covenants and bond indentures. Some bondholders disagreed vehemently, asserting that Calpine was only allowed to either buy back debt with the proceeds, or to actually invest in revenue-producing properties - not just buy commodities, like gas, that would be quickly consumed with nothing permanent to show for it. They convinced the collateral trustee for the proceeds, Bank of New York, to freeze the remaining proceeds, which caused Calpine to turn to the Delaware Court of Chancery in a lawsuit against Bank of New York and Wilmington Trust to unblock its access to the remaining monies.

But the court agreed with the bondholders, refused Calpine's request and to boot ruled that Calpine would have to repay the nearly $312 million. Calpine claimed hardship and offered to repay $199 million within 90 days - while the bondholders demanded repayment in full, immediately. Seeking to steer a Solomonic middle course, court vice chancellor Leo Strine gave Calpine about seven weeks, until Jan. 22 to pay the full amount, a compromise that satisfied no one. Both Calpine and Wilmington Trust appealed his ruling - though for vastly different reasons - with the Delaware Supreme Court scheduled to hear arguments in an expedited proceeding beginning Dec. 15.

Wilmington Trust meantime warned Calpine it had to pay up immediately or face a default, a move widely seen as an exercise in protecting the bondholders' legal rights rather than an actual attempt to push Calpine over the brink and into insolvency. Calpine sought a temporary restraining order against any default move, and late Wednesday said it was in talks with the bank in an effort to defuse the situation. Wilmington Trust held off on issuing the notice of default, as it continued to negotiate with Calpine. On Thursday, Calpine withdrew its restraining order as the second-lien noteholders and their trustee agreed that they will not accelerate any of the debt.

A trader in distressed bonds said that precious little was happening outside of such story names as Calpine and Refco; for instance, he said, there was "nothing" going on in the airlines and nothing happening with asbestos-challenged companies. "Everybody was in a holiday mood," he declared.

He did see some firming in the bonds of bankrupt St. Louis-based chemical manufacturer Solutia Inc., with both its 6.72% notes and its 7 3/8% notes due 2027 firmed to 75 bid, 77 offered, from 71 bid, 73 offered, although he had no explanation of the advance.

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