Calpine bonds climb on asset sale news; Northwest Airlines resumes downward flight; Delta, UAL firm

By Ronda Fears

Nashville, June 14 - Calpine Corp. dominated activity Tuesday in the distressed bonds arena, moving upward as airline paper led by Northwest Airlines Corp. took a backseat and continued to spiral downward. That said, there were some traders in Delta Air Lines Inc. and United Airlines parent UAL Corp. bonds who described the paper as feeling firmer.

There was little news to spur activity on distressed desks, traders said. Still, at various junctures of the session traders dropped names as they spotted activity, albeit sketchy.

Small appliance manufacturer Salton Inc. continued to slide Tuesday, a day after recalling a batch of Kenmore coffee pots, with a trader mentioning the 10¾% bonds due Dec. 15, 2005 at 60 bid, 62 offered.

aaiPharma Inc., the bankrupt drugmaker that specializes in painkillers, was suffering from a sell-off, one trader said, but he said he knew of no news moving the paper. He pegged the 11.5% bonds at 46 bid, 47 offered and noted that aaiPharma shares fell about 3.5% on Tuesday.

Plastics and chemicals concern Solutia Inc.'s 7 3/8% bonds also were mentioned, with a trader saying he saw a trade in the bonds at 84.125. He did not specify that the bonds were higher, but Solutia shares gained 8% during the session.

Intermet Corp. bonds traded higher with Ford Motor Co. and General Motors Corp. stock, another trader said. The maker of auto components such as chassis was one of the first casualties in the down cycle of automobile production levels. The trader said the Intermet 9¾% bonds due 2009 traded up to 46.5 bid, 47.5 offered.

Mirant Corp., another power name, traded up with Calpine as there was no news of its own, traders said. The 2½% convertible bonds were described as about 1 point higher on the back of the Calpine news, gaining to 77.125 bid, 78.125 offered.

Calpine paper adds 3 points

Calpine's bonds extended gains again Tuesday as the struggling independent power producer identified four power plants it will sell as part of its latest turnaround plan outlined last month. The San Jose, Calif.-based company said it expects to raise $357 million from the asset sale.

While the asset sales are controversial among onlookers, particularly some who are concerned that it will lay the company out to be vulnerable to skyrocketing energy prices, Calpine bonds reacted very favorably to the news.

"Asset sales are always good for the bondholders," one bond trader said. "The bonds are up about 3 points on the back of the news."

The 8¾% bonds of 2007 were pegged at 75 and the 7 7/8s due 2008 at 71.25.

Sale proceeds will be used to trim a debtload of about $18 billion, which Calpine has pledged to cut by $3 billion before 2006. With electricity prices still far below the highs of 2000 and 2001 and natural gas prices rising in tandem with crude oil, some onlookers fear that plans to sell power plants and natural gas production properties will leave the company "hanging without a hedge" as one convertible trader put it.

The convertible trader added, however, that there is still some negative overhang by news last week of an SEC request for documents relating to Calpine's downward revision of proved oil and gas reserve estimates plus documents concerning other matters as well.

He said the Calpine convertibles followed the stock a tad lower, with the 4.75% issue at 69¾ bid, 70¾ offered. He pegged the 6% convertible at 81. Calpine shares, meanwhile, shed a nickel on Tuesday, closing at $3.35.

Northwest heads downhill

Conversely, Northwest Airlines paper continued a downward spiral Tuesday on the heels of further speculation that the carrier could be on the verge of filing bankruptcy.

Standard & Poor's on Tuesday lowered its long-term ratings on Northwest Airlines to CCC+ from B and the short-term ratings to C from B-3.

As Northwest shares dropped another 4.3% on Tuesday, traders said the bonds lost another 1 to 2 points. The 8.7% bonds due 2007 were quoted at 54.5 bid, 55.5 offered, the 7 7/8% bonds due 2008 at 49.5 bid, 51.5 offered and the 10% bonds due 2009 at 52.25 bid, 53.25 offered. The Northwest convertibles also lost ground, with the 6 5/8% issue pegged at 53.25 bid and 7 5/8% issue at 47.5 bid.

S&P analysts pointed out that Northwest has so far obtained only $300 million of a total $1.1 billion in annual labor concessions being sought. The union mechanics are a particular source of concern, as media reports suggest both sides are preparing for a strike.

The rating agency said Northwest's credit ratings outlook was developing, noting that the carrier has sizable upcoming debt and pension obligations, too.

Northwest bank paper solid: S&P

S&P said Northwest's B- bank loan rating, one notch higher than the corporate credit rating, reflects a high expectation of full recovery in the event of default.

The $975 million amended and restated senior credit facility consists of a $575 million tranche A term facility due Nov. 23, 2009 and a $400 million tranche B term facility due Nov. 23, 2010.

Delta, UAL rise

Northwest was a definite drag on the airline sector, along with crude oil prices that stubbornly continue to hover at around $55 a barrel, but one trader said UAL and Delta bucked the downward trend to drift slightly north on Tuesday.

"We saw some buyers for the Delta bonds; those are off 10 points over the last week," said a distressed trader. "Some people see Delta as reaching for a falling knife, but there are still those who think they will make it through this year. So, the short-dated paper is doing a lot better."

The trader said Delta's 7.7% issue due 2005 traded at 86 and the 7.79s at 84 while the 7.92% bonds due 2012 were at 61. Delta's convertible bonds were described as about a quarter-point better.

Another trader said UAL bonds also were better, in the mid-teens, as the stock rallied about 12.5% on Tuesday.

Delta paper has plunged in the past week after seeing an upswing in recent weeks on anticipation that a string of financing activities would help stave off bankruptcy for this year at least. But the paper took a sharp dive Tuesday along with the pack of airlines.

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