Calpine gains after denying rumors; MCI, Qwest higher as Verizon wins; primary quiet

By Paul A. Harris

St. Louis, May 2 - The high-yield market continued flat to slightly improved on Monday, although headline news selectively caused some issues from names such as Calpine Corp., MCI, Inc. and Qwest Communications International Inc. to rise conspicuously.

Elsewhere, however, the bonds of Primus Telecommunications Group, Inc. were off sharply on weak earnings news.

Meanwhile the primary market stood stock still, with sources reporting throughout the session that the high-yield new issue market turned out no news whatsoever during the first session of May 2005.

"It really seemed like the market wanted to rally today," one trader said late Monday.

"You got the sense that people wanted to see if the bloodletting would stop and if they could find some kind of plateau.

"But ultimately it was a really slow session, so it's hard to draw any conclusions."

But another trader saw the market generally lower, although not dramatically so, with one or two exception.

"The market was a little weaker overall today," the trader commented. "We saw no dramatic buying. Some of the weaker names were definitely weaker, especially with some of the earnings releases."

All eyes on Calpine

This trader added that one company which garnered a great deal of attention during the session was San Jose, Calif., independent power producer Calpine Corp.

And for a change the news was good on Monday.

On Friday, with its securities in free fall on rumors that it was exploring options with regard to a possible bankruptcy filing, Calpine issued a press release addressing what it called "false market rumors" that had created trading pressure on the company's securities.

The company went on to state that its figures for the first quarter of 2005 were in line with the management's expectations and that the company was on track to meeting its earnings projections for 2005.

"People are either starting to believe what the company says, or they're at least breathing a sigh of relief," the trader said Monday.

"Bankruptcy does not look imminent with $800 million of cash on the balance sheet."

The trader said that Calpine's 8¼% notes due 2005 closed Monday at 90.0 bid, 92.0 offered, up about a point from 89.0 bid, 91.0 offered late Friday.

Meanwhile the 10½% notes due 2006 caught a nice bounce, according to the trader, closing at 77.50 bid, 79.50 offered, up from 75.0 bid, 77.0 offered at Friday's close.

And Calpine's 8½% notes due 2011 were up smartly at 53.0 bid, 55.0 offered going out on Monday, from 48.50 bid, 51.0 offered on Friday.

Another source also saw Calpine's 8¼% bonds due 2005 at 90.0 bid, 92.00 offered.

MCI up on merger news

News Monday that MCI has determined that a revised offer from Verizon Communications Inc. is superior to the offer it received from Qwest Communications International Inc. lifted the bonds of both MCI and Qwest.

Verizon's revised offer provides at least $26.00 per MCI share, according to a Monday press release from MCI.

The MCI board said that it in making the determination it had considered the changing competitive nature of the telecommunications industry and the expected competitive position of a combined Verizon/MCI versus a combined Qwest/MCI. It also considered the increasing need for scale and comprehensive wireless capabilities, as well as the reduction of access costs and the size of Qwest's contingent liabilities and the risks associated with those liabilities.

The MCI board also considered the relative strengths of Verizon's and Qwest's capital structures.

In addition, MCI's Board noted that a large number of MCI's most important business customers had indicated that they prefer a transaction between MCI and Verizon rather than a transaction between MCI and Qwest. "From the standpoint of risk versus reward, Verizon's revised offer presents MCI with a stronger, superior choice," said Nicholas deB. Katzenbach, MCI board chairman. "Shareholders receive enhanced value with greater assurance that the transaction will create additional shareholder value."

MCI's bonds were quoted higher on the news.

One trader saw its 6.688% notes due 2009 going home at 104.50 bid, 104.75 offered, up from 103.0 bid at Friday's close.

Meanwhile he quoted the 7.735% notes due 2014 finishing at 110.25 bid, 110.75 offered, up 2.25 from their Friday close of 108 bid.

And the short paper, the 6.908% notes due 2007, was up 0.25 at 101.50 bid, 102 offered.

Another trader spotted MCI's 6.908% notes due 2007 higher at 101.75 bid, 102.25 offered, while the 6.688% notes due 2009 were also up, at 104.50 bid, 104.75 offered.

Meanwhile this trader said that the 7.735% notes due 2014 were at 110.625 bid, 111.125 offered at of Monday's close, up from 108.75, 109 before the news.

Good news for Qwest's balance sheet

While Qwest's proposal to acquire MCI ultimately lost out to that of Verizon, the news that Qwest's balance sheet would not become over-extended in the acquisition process caused its bonds to trade up, according to a trader.

The trader saw Qwest's 7¼% notes due 2011 at 89.50 bid on Monday, up a point from 88.50 bid on Friday.

Meanwhile Qwest's 8 7/8% notes due 2031 went out Monday at 99 bid, par offered, up half a point from 98.50 bid, 99.50 offered on Friday.

Another market source saw the Qwest 7¼% notes due 2011 at 90.25 bid, up from 89.0 bid at the open.

This source had the 7¼% notes due 2014 at 95.0 bid, up a half from 94.50, while the 7½% notes due 2023 were up a half to 90.0 bid, and the 7¼% notes due 2035 were up three-quarters to 86.25 bid.

Primus plunges on earnings news

Meanwhile negative earnings news sent the bonds of McLean, Va.-based Primus Telecommunications Group sharply lower.

The company reported a net loss of $35 million for the first quarter of 2005, including a $3 million net loss from foreign currency transactions and a $4 million write-down of European wireless handset inventory and receivables. That compares to a net loss of $10 million - including a $1 million net loss from foreign currency transactions and a $14 million loss on early extinguishment of debt - in the first quarter 2004.

As a result, Primus reported a loss of $0.38 per common share for the first quarter 2005, versus an $0.11 per share loss in the first quarter of 2004.

"We are executing our strategy of offering a broader portfolio of services, including voice, DSL, wireless and VoIP services to strengthen our competitive position in our major markets," said K. Paul Singh, chairman and chief executive officer of Primus, in a Monday press release. "Our major challenge continues to be generating margin contribution from our new initiatives at rates that exceed the declining contribution from our core long distance and dial-up ISP businesses. Growth from our new initiatives, however, is continuing at anticipated levels."

Late Monday a trader simply said: "They're getting killed.

"To my mind their numbers were absolutely atrocious," the trader added, calculating that "for all intents and purposes Primus' year-over-year loss had tripled.

"Their stock got cut in half," the junk trader said, spotting Primus's common shares at $0.77, down 74 cents on the day.

They blew through every low-end EBITDA estimate out there. It was horrible."

The trader saw Primus's 12¾% notes due 2009 at 59.50 bid, 60.50 offered, late Monday.

"Last Friday they had a really wide bid-offer," the trader added, noting that at the end of last week Primus' 12¾% notes were quoted at 75.0 bid, 80.0 offered.

"Triple-Cs are getting killed," the trader commented. "It seems like a lot of them have missed their numbers. And the elevator down is not stopping on every floor at this particular time.

"Right now if you're a triple-C and you miss, you get crushed. It's not a very forgiving market."

Another trader saw the Primus' 12¾% notes down at 66 bid, while its 8% paper had traded at 49.75 bid.

"It's all over the place," the trader commented.

A lift for Level 3

Level 3 Communications Inc., which last week reported a smaller than expected loss for the first quarter of 2005 as revenue from network services increased during the period, saw its existing bonds rise on Monday.

"They were weak on Friday but stabilized on Monday," one trader said, spotting Level 3's 9 1/8% notes going out at 79.25 bid, 80.25 offered, up from 77.50 bid, 78.50 bid on Friday.

Meanwhile he saw the company's 11% notes due 2008 also up a point to 87.0 bid, 89.0 offered, from 86.0 bid, 88.0 offered on Friday.

Sparse news on recent issues

Bid-offer levels on recently priced junk bonds were by no means easy to come by Monday.

A few levels on recent issues were available however.

Movie Gallery, Inc.'s new 11% notes remained slightly above their issue price.

On Monday, April 25, the company priced $325 million of 11% notes due 2013 at 98.806 to yield 11¼%, via Wachovia Securities.

One source had the notes trading at 99.0 on Monday, unchanged.

A trader, meanwhile, had the bonds up a little at 99.50 bid, 99.875 offered, having "tightened toward the offer side," from the 99.0 bid, 99.50 offered on Friday.

Another recently priced deal seen trading Monday was that of Hawaiian Telcom Communications Inc.

The company priced a downsized $500 million transaction involving three tranches on Wednesday via Goldman Sachs.

Included were $200 million of 9¾% notes due 2013 (B3/B-) which priced at par. A market source said that while those bonds had dipped below their issue price late in the final week of April they were trading back up at par on Monday.

Hawaiian Telcom also sold $150 million of senior floating-rate notes due 2013 (B3/B-) at par to yield six-month Libor plus 550 basis points. Late last week, the market source said, the floaters had softened, but on Monday they were seen plowing back towards their issue price, at 99.75, up a quarter on the session.

Finally the company sold $150 million of 12½% senior subordinated fixed-rate notes due 2015 (Caa1/B-) at par. Those also had traded off late last week but were again heading back towards par on Monday. The source spotted the 12½% sub notes also at 99.75, also up a quarter on the day.

Finally among the most recently priced junk issues, Gardner Denver Inc.'s 8% senior subordinated notes due 2013 (B2/B) were seen trading above their issue price on Monday.

The company priced $125 million at par last Friday via Bear Stearns & Co. and JP Morgan.

On Monday a trader spotted the bonds at 100.25 bid, 100.625 offered.

Primary takes a seat on the pine

The primary market on Monday produced no news whatsoever, an array of sell-side players said.

When pressed for any sort of development on any of the issues thought to presently be in the market, sell-siders turned out empty pockets.

"It's a very tough market," one commented in a late Monday email message. "Investors are very selective with credits.

"The market lacks conviction. Releasing price talk is just trying to have price discovery with the market."

Meanwhile another source said: "It looks like we may have a pretty quiet week.

"Spreads continued to widen last week by 25 to 30 basis points. And you saw similar weakness in the euro market.

"April was a terrible month in the equity market, and certainly it turned the corner for high yield. The investment-grade market is also very lackluster.

"The new issue pace is slow.

"People are very concerned about credit risk. People are being very defensive. And they are trying to determine the appropriate spread for today's market.

"It certainly is not the January-February spread," the sell-side official added.

"After you factor into all of the credit risk that is looming, I think you look for it to continue to widen.

"Overall people are expecting this negative sentiment the continue for some time to come."

The Fed: only one thing to do?

The upcoming meeting of the Federal Reserve Federal Open Market Committee on Tuesday is not likely to have any immediate impact on high yield unless the Fed does not act according to the script, said the official.

In that case, the source said, the impact could be negative.

"People expect a 25 basis points hike," the official asserted. "Anything different from that expectation will create some concerns.

"With the weak economic data that came out last week, such as the lower-than-expected 3.1% GDP number and the jobless claims, people are beginning to say that the U.S. economy has hit a soft patch.

"So you don't look for the Fed to do anything more than 25 basis points."

But not less than 25, either

This sell-sider also said that high yield would likely not react favorably should the Fed decide to stay its hand, and decline to bump the rate on Tuesday.

"When you factor in inflation the interest rate is still very low," said the source. "The Fed's overnight funds rate is nowhere near a neutral position. So they will continue to raise the rates."

Seven deals

Elsewhere, a primary market source said that at present seven deals are thought to be in the market.

All, some or none of them might price by week's end, the source said.

The Prospect News High Yield Daily forward calendar has seven issues, totaling $985 million and €1.175 billion, thought to be in the market.

The include

* Kloeckner Investment SCA's €350 million of 10-year senior notes (B3/B-), via JP Morgan and Barclays Capital;

* Greenbrier Cos.' $175 million of 10-year senior notes via Banc of America Securities and Bear Stearns;

* GSI Group Inc.'s $125 million of eight-year senior unsecured notes (B3/B-) via Lehman Brothers;

* PetroQuest Energy Inc.'s $150 million of eight-year senior notes (Caa1/CCC+) via Credit Suisse First Boston;

* Premium Standard Farms Inc.'s $125 million of 10-year senior unsecured notes (B1/BB) via Morgan Stanley;

* Mandra Forestry Finance Ltd.'s $200 million maximum of eight-year senior notes (B1/B), also via Morgan Stanley; and

* CellC (Pty) Ltd.'s €625 million in two tranches: seven-year first-priority secured notes (B2/BB-) and 10-year senior subordinated notes (Caa1/B-), via Citigroup.

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