Calpine lower ahead of accord; Galaxy, CMS, Cleveland Unlimited price; funds see $361 million inflow

By Paul Deckelman and Paul A. Harris

New York, Dec. 8 - Calpine Corp. bonds were mostly lower on the day as investors awaited word on the outcome of talks between the troubled San Jose, Calif.-based power generating company and the trustee for its second-lien debt aimed at averting an event of default which would almost certainly trigger a Calpine bankruptcy. As trading was finishing up, word came that the trustee had agreed - for now - not to accelerate that $3 billion of debt and send Calpine over the edge. Traders speculated that this might help Calpine in Friday's dealings.

In the primary sphere, Galaxy Entertainment Finance Co. Ltd. was heard to have priced an upsized two-part offering of fixed and floating-rate notes, which was well received when it moved over to the secondary market. Also pricing were deals from Cleveland Unlimited Inc. and CMS Energy Corp. - the latter deal a quickly marketed drive-by offering.

One market source marked the high-yield secondary flat on Thursday and said that the main attention was the primary market, with a very heavy calendar.

And as trading wound down for the session, market participants familiar with the weekly fund-flow statistics compiled by AMG Data Services of Arcata, Calif., told Prospect News that $361 million more came into the funds in the week ended Wednesday than left them. It was the second straight inflow, following the $225 million infusion seen in the previous week (ended Nov. 30). In that two week stretch, inflows have totaled some $586 million, according to a Prospect News analysis of the AMG figures - not too shabby for two weeks, but still not very much when compared with the roughly $3.306 billion that hemorrhaged from the funds over the previous 11 weeks, according to the Prospect News analysis.

Even with the latest week's inflow, outflows have still been seen in 12 weeks out of the last 15 and in 18 weeks out of the past 22. During that latter timeframe, net outflows have totaled about $3.818 billion, according to the analysis.

For the year so far, outflows have now been seen in 38 weeks of the 49 since the start of the year, against only 11 weekly inflows. Cumulative net outflows for the year total around $10.632 billion, according to the analysis, down from $10.993 billion last week.

The new inflows notwithstanding, it is still evident that the junk funds have recently reverted to the trend seen earlier in the year, when outflows totaling about $6.776 billion were seen in 15 straight weeks from mid-February through late May, according to the analysis. After that, there was a short period in which no clear trend could be seen, with about a month of inflows and outflows showing up on alternating weeks - but since July, money has been almost consistently flowing away from the funds, with the exception of the most recent two weeks.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

Two price on Thursday

The primary market saw $275 million of issuance price in two tranches from two issuers on Thursday.

Meanwhile with 11 full sessions left to play out in the 2005 bond market no new roadshow starts were heard.

Cleveland Unlimited Inc. priced a $150 million issue of five-year senior secured floating-rate notes (Caa1/CCC+) at par to yield three-month Libor plus 825 basis points.

The Libor plus 825 basis points coupon came 37.5 basis points beyond the wide end of the Libor plus 775 basis points area price talk.

Jefferies ran the books for the capex funding and debt refinancing deal from the wireless voice and text messaging services provider for the Cleveland and Akron areas, which markets its services under "Revol" brand.

And in a drive-by, CMS Energy priced a $125 million issue of 10-year senior notes (B1/B+/BB-) at par to yield 6 7/8%, on top of price talk.

Citigroup and Merrill Lynch & Co. ran the books for the deal, proceeds from which will be used to pay down one of the Jackson, Mich., company's pre-pay gas supply contracts and for general corporate purposes.

Macau's Galaxy Casino went well

Meanwhile terms were heard Thursday morning on the upsized Galaxy Casino deal that priced on Wednesday night.

Galaxy Entertainment Finance Co. Ltd. priced $600 million senior notes transaction (expected ratings B1/B+) in two parts. The deal was increased from $500 million.

The company priced a $350 million tranche of seven-year notes at par to yield 9 7/8%. The issue came at the low end of the $350 million to $400 million estimated range, while the yield came at the tight end of the 9 7/8% to 10% price talk, which had been revised inward from 10% area.

The Macau-based gaming company also priced $250 million of five-year notes at par to yield six-month Libor plus 500 basis points. The floating rate tranche came at the high end of the $200 million to $250 million estimated range and priced on top of price talk.

Merrill Lynch & Co. and Morgan Stanley ran the books the construction funding deal.

A trader who focuses on the Asian emerging markets said that the deal - which played to investors in Asia, Europe and the United States - had apparently gone well.

The trader added that the fixed-rate notes had traded as high as 103.0 bid in the secondary before closing out Thursday at 102.25 bid.

A syndicate source said that the deal had been multiple-times oversubscribed.

On to Friday

Some news surfaced during the Thursday session on deals expected to price on Friday.

Massey Energy Co. is talking its $725 million offering of eight-year senior notes at 7% to 7¼%. UBS Investment Bank has the books.

News also surfaced on another Asian deal playing to some U.S. high-yield accounts. Thailand pulp and paper producer Advance Agro PCL widened talk to 11½% to 11 5/8% from the 11½% area on its $250 million offering of seven-year bonds (B3), coming via Deutsche Bank and ABN Amro.

One market source said early in the day that the deal was heard to be oversubscribed. However the above-mentioned trader who focuses on Asian credits seemed skeptical when hearing that color. The trader had been under the belief that the deal would price on Thursday, and added that price talk does not tend to widen on oversubscribed deals.

In addition to Massey Energy and Advance Agro, the market anticipates hearing terms on Clarke American Corp.'s $175 million of eight-year senior notes (B2/B-) via Bear Stearns and JP Morgan. Talk is for a yield in the 11½% area.

Also possible for Friday is National Coal Corp.'s $80 million of seven-year senior secured notes via Jefferies. An informed source said that price talk could be out sometime Friday.

Galaxy jumps in trading

When Galaxy Entertainment's new bonds were freed for secondary dealings, both the floating-rate notes due 2010 and the 9 7/8% notes due 2012 were being quoted around the 102 bid, 103 offered area, "a nice little movement" up from their par issue price earlier in the session, a trader said.

The trader also saw CMS Energy's new 6 7/8% notes due 2005 at 100.5 bid, 101.5 offered, while a second saw the bonds at 100.625 bid, 101.375 offered.

Traders did not see any aftermarket activity in the new Cleveland Unlimited floating-rate notes due 2010.

Calpine lower

Back among the established issues, Calpine's bonds were seen on the downside, as holders awaited the outcome of the company's talks with Wilmington Trust Co., the trustee for its second-lien debt-holders. The talks were aimed at heading off the threatened imposition of a default notice by the trustee, which would likely plunge Calpine into bankruptcy in the view of most observers.

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 were 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.

GM higher

Elsewhere, a trader said "it was all Calpine and GM today [Thursday]," quoting the latter's benchmark 8 3/8% notes due 2033 at 70.5 bid, 71.5 offered, and its General Motors Acceptance Corp. 8% notes due 2031 up a point at 95 bid, 95.75 offered.

Yet another trader saw those GMAC benchmark bonds at 94 bid, 95 offered, calling them a point better on the day.

Published reports Thursday indicated that at least four interested parties have put out feelers to GM regarding its prospective sale of majority control of its GMAC unit, with an as yet unspecified deadline for initial bids said to be approaching.

Those stories indicated that potential buyers could include the GE Consumer Finance unit of General Electric Co., HSBC Holdings plc and Citigroup, all of whom have declined comment on the speculation.

However, two other major financial players - Wells Fargo & Co. and Bank of America - have specifically declared that they are not interested in buying control of GMAC. GM is selling control of the profitable GMAC unit - really its only reliable North American profit center right now, earning $2.2 billion for GM in the first nine months of the year while its parent posted a $3.8 billion loss - in order to join the financing unit to a deep-pocketed, investment-grade financial buyer and thus restore its investment-grade credit rating and cut its borrowing costs.

The automotive sphere also saw GM rival Ford Motor Co.'s benchmark 7.45% notes due 2031 half a point better at 72.75, and its Ford Motor Credit Co. 7% notes due 2013 likewise up a half at 88 bid, 89 offered, despite a lack of fresh news about the Number-Two domestic carmaker.

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