Calpine up on asset sale, then eases; Delta misses airline party led by Northwest; Symmetricom emerges

By Ronda Fears

Nashville, May 31 - After a three-day weekend, which was longer for some convertible players who also took Tuesday off, trading was described as brisk with the convertible market "feeling pretty firm, or at least steady" against the slide in stocks. Also, after the closing bell a small new issue popped up, but it will do little to improve issuance levels totted up thus far or count in league tables for May, as it prices later this week.

Distressed paper stole a good portion of the limelight with several downtrodden issues - particularly in the airline space - gaining ground. Independent power producer Calpine Corp. also rose, but settled off the day's highs, on news it has agreed to sell its Saltend Energy Centre in England for about $925 million. Trash hauler Allied Waste Industries Inc. gained slightly as well on selecting John Zillmer, a former executive at Aramark Corp., as its new chief executive.

Delta Air Lines Inc. was notably shut out of the party among airline issues, which was largely propelled by an upgrade in Northwest Airlines Corp. debt and equity by Merrill Lynch & Co., which recommended several trades in the sector. (See full report elsewhere in this edition.) News of UAL Corp., the parent of United Airlines, winning crucial cost saving deals with union employees also helped the pack.

Symmetricom launches

San Jose, Calif.-based communications equipment maker Symmetricom Inc. launched a small deal after Tuesday's close with the $100 million of 20-year convertible notes talked with a 2.75% to 3.25% coupon and 25% to 30% initial conversion premium.

It won't help issuance figures much, which Prospect News tallied at $1.06 billion for May including investment bank deals. The month's total was less than 20% of May 2004 issuance, which Prospect News put at $5.61 billion. Year to date, Prospect News has counted $11.21 billion, well below half of the $28.5 billion through the same period last year. Citigroup Global Markets Inc. analyst Stuart Novick said, based on the firm's count, prorating this year's five-month results would make it the weakest year for convertible issuance since 1997 when 105 issues raised $21.8 billion. (See full report elsewhere in this edition).

Symmetricom's deal is slated for Thursday's business.

The company, which makes network synchronization and timing solutions for the government, utilities, research centers and aerospace markets, plans to use proceeds for working capital and general corporate purposes, which may include acquisitions.

Last week the stock was hit after Morgan Keegan downgraded the equity to market perform from outperform due primarily to valuation and the lack of new near-term catalysts. Analyst Simon Leopold reportedly said upgrades of synchronization systems by telecom carriers is overdue, which supports his long-term growth thesis, but he doesn't see many opportunities for significant upside surprises.

Symmetricom shares ended Tuesday off 4 cents, or 0.35%, at $11.28 but were seen in after-hours trading lower by 53 cents, or 4.7%, on the convertible news.

Calpine 4.75s hit 62 on sale

Calpine convertibles and other securities shot up on news that the San Jose, Calif., independent power producer was selling its power plant in England to International Power plc and Mitsui & Co. for $892 million, or $925 million after cash flow adjustments, which was more than onlookers had been expecting. But the issues came off the day's high as some analysts as well as traders broadcast views that the run-up seemed overdone.

"It's not a big deal; everybody knew it was coming," said a sellside convertible trader.

"It doesn't bail them out."

The Calpine 4.75% convertible bonds due 2023 went as high as 62 on the news, a gain of 2 to 3 points from Friday's levels, but were seen around closing time at 59.375 bid. The Calpine straight 8.5% bonds due 2008 were seen up 4 points at 59.5 bid, 61 offered at the close.

Calpine shares climbed 28 cents on the day, or 10.37%, to settle at $2.98.

Calpine reaction overblown

Credit analysts seemed to agree that the reaction to the news was exaggerated. Kim Noland, bond analyst at GimmeCredit, said in a report Monday on the news of Calpine's sale that the run-up in the power firm's securities may have been overdone.

"Calpine's stock price has almost doubled from month-ago levels and unsecured bonds climbed to near 57 last Friday after low ticking near 42 when bankruptcy rumors roiled the market at the end of April," Noland said in the report. "Not much has really changed, however, and the recently filed 10-Q suggests liquidity could get tighter."

Standard & Poor's said that it views Calpine Corp.'s (B/negative) announced sale of its Saltend plant as favorable for credit quality, but S&P analyst Jeffrey Wolinsky noted the sale is in line with expectations and does not affect the rating or outlook on Calpine debt.

Calpine 5s gain at bonds' expense

Proceeds from the Saltend plant sale will be used to redeem two existing series of redeemable preferred shares for about $620 million, per Calpine's existing bond indentures, and the Calpine 5% convertible High Tides are close to the top of the list to be the next chunk of debt Calpine has to deal with. But onlookers say taking out the High Tides may come at a cost to other security holders as well as liquidity.

"Definitely, these [5% convertible High Tides] are somewhere at the top of the list," a sellside convert trader said. "You can see that by where they are trading, near [the 50] par."

Calpine's 5% convertible was up by a half-point around midday and traded as high as 47.125, the trader said, but also retreated somewhat to end the day up by a quarter-point at 46.25 bid, 47.25 offered.

"The next hurdle will be $400 million of High Tides due in August," said GimmeCredit's Noland. "Calpine may try to use cash to pay these junior securities, disadvantaging bondholders."

"The Saltend sale, if executed, is good news, but the limited detail about other transactions leads us to question whether the run-up in bond prices is overdone. While some bondholders are litigating to protect their rights (e.g., the Harbert lawsuit in Canada), there isn't much ability to prevent indenture violations for other bonds."

International Power issues steady

International Power is another convertible name with two issues in play - both issued in dollars - that were described as steady on the Calpine purchase news. International Power is going to pitch in 70% of the total price tag for the Saltend plant and Mitsui will make up the 30% difference.

According to news reports, International Power expects the joint venture will also fund some of the full amount with a small piece of debt. International Power said the deal will boost its earnings in its first full year of ownership.

"This asset will be integrated into our portfolio in the U.K. market, where we have a blend of efficient and flexible gas, coal and hydro generation," said International Power CEO Philip Cox.

The deal is expected to be completed by the end of July. Last year, International Power and Mitsui bought the international power plant portfolio of Edison International for £1.04 billion.

International Power's 2% convertible due 2005 was pegged at 110.875 bid, 111.625 offered and the 3.75% convert due 2023 at 139.25 bid, 140.25 offered. The common stock closed in London up 1.50p or 0.78%, at 193.50p.

Delta off as Northwest, others fly

Many players agreed with the Merrill analysts that airline securities were poised to participate in a summer rally anticipated for the broader markets, and many of those took off on a Merrill upgrade for Northwest specifically, but Delta was excluded.

"At this point in any industry with too much capacity, too high costs, you do one thing - big mergers of equals- and fire folks like crazy," said one sellside convertible trader, who suggested a Delta combo with Continental Airlines Inc. would seem appealing.

Another agreed, noting the America West Holdings Corp. merger with US Airways Corp. also is expected to ease the over-capacity situation. He suggested a Delta alignment with AMR Corp., parent of American Airlines Inc., would be viewed favorably with "the point being, it [Delta] would need to align itself with a 'winner'... versus another 'loser' like NWAC."

Merrill upgraded Northwest shares and its 8.875% bonds, plus gave a plug for several airline converts as an outright play or swap out of the common stock, such as was the case for AMR Corp., Continental Airlines Inc. and JetBlue Airways Corp. Merrill analysts actually included Delta shares as a consideration in recommending buying the most leveraged equity, but negative sentiment on the ailing Atlanta-based carrier prevailed.

Delta's 8% convertibles dropped a half-point to 37.25 bid, 39.25 offered, and the 2.875% converts lost 1 point to 35 bid, 37 offered, while the stock fell 14 cents, or 3.57%, to close Tuesday at $3.85.

Conversely, Northwest's convertibles were better by 2 to 3 points, the Continental convertibles added 0.5 to 1 point and the AMR convertibles gained about 0.5 point while all those stocks gained firmly. Northwest shares rose nearly 9% on the day.

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