Calpine bank debt, bonds retreat on results; Delta again dives, pulls Northwest lower

By Paul Deckelman and Sara Rosenberg

New York, Aug. 3 - Calpine Corp.'s bank debt and junk bonds were both lower on Wednesday after the company released financial and operating results for the second quarter that disappointed investors.

Meantime, bondholders were hitting the silk and bailing out as Delta Air Lines Inc.'s bonds fell sharply for a second consecutive session amid continued market fears that the troubled air carrier will not be able to keep from crash-landing in Chapter 11.

Bankruptcy speculation was also swirling around rival airline operator Northwest Airlines Corp., which like Delta is also bedeviled by high fuel prices and heavy pension costs, plus a situation unique to the Eagan, Minn.-based Number Four U.S. carrier - the distinct possibility it may be struck later in the month by disgruntled mechanics.

After San Jose, Calif.-based electricity generator Calpine reported its less-than-powerful results for the second quarter ended June 30, its second-lien paper took the brunt of the negativity, bank debt traders said.

That loan paper was quoted down about three points on the day, closing out the session at 83.5 bid, 85 offered, according to a trader.

By comparison, the CalGen second-lien bank debt was unchanged to maybe down a half a point, with levels closing out the day at 99.5 bid, 100.5 offered, and the CalGen first-lien bank debt was unchanged at 101 bid, 102.5 offered, the trader said.

In the junk bond market, a trader estimated Calpine's bonds "down two or three points," spotting the Calpine Canada Energy Finance ULC 8½% notes due 2008 three points lower at 71 bid, 73 offered, while the parent company's 7¾% notes due 2009 retreated a point to 67 bid, 69 offered.

Calpine, another trader said "got mushed in the morning - and I don't think they recovered much," after the company reported its wider loss, and after a Canadian court ordered Calpine to set aside some funds to make sure that some - though not all - of the holders of the Calpine Canada Energy Finance bonds receive payment on their bonds at face value (see related stories elsewhere in this issue)

He quoted those bonds at least three points down at 71 bid, 73 offered, while Calpine's 8½% notes due 2011 were "off three points" during the session, before "gaining a little back" to close two points lower at 69 bid, 71 offered.

All of the other Calpine bonds, he said, were down "across the board," with the exception of the 10½% notes due 2006, hanging in not much changed at 94.5 bid, 95.5 offered.

A market source quoted Calpine's 8¾% notes due 2007 off 1½ points at 79.5 bid, while its 83/4s due 2013 were down more than two points at 74.5. The source saw the Calpine Canada 81/2s down 1¼ points at 71.25.

Another trader saw Calpine's 101/2s half a point lower at 95 bid, 95.5 offered.

"It was funny," he opined, "the way they raced up yesterday [Tuesday], I don't know what the market was looking for - but they didn't get it."

With those 10½% notes scheduled to come due next year and thus trading at relatively high levels, "most of the action was in the longer unsecureds," he said, with Calpine's 8½% 2011s - which he said had "also run up yesterday" - falling to 68.5 bid, 69.5 offered, well down from 72.5 bid of Tuesday.

During the second quarter, Calpine reported a net loss of $298.5 million (66 cents per share), compared with a net loss per share of seven cents, or a net loss of $28.7 million, for the same quarter in the prior year. Revenue for the quarter was $2.2 billion, representing an increase of 0.5% over the same period in the prior year.

Included in the quarter's results are various non-routine items that in the aggregate netted to a charge of 11 cents per share, consisting of impairment charges on two power plants in operation and three in development, cancellation charges to terminate several long-term service agreements, and a net gain on the repurchase of debt.

"During the second quarter, spark spreads were mixed, and Calpine experienced several unplanned equipment outages in key power markets. Financial results were further impacted by power plant and development project asset impairments and service agreement cancellations, totaling just over $200 million. These were partially mitigated by approximately $129 million of income from repurchase of debt," said Peter Cartwright, president and chief executive officer, in a company news release.

"While results for the quarter were disappointing, Calpine continues to make significant progress in advancing our strategic initiative to de-lever our balance sheet and reduce interest expense and operating costs. In just over two months since our May rollout, Calpine has completed or announced over $2 billion of transactions toward attaining these goals, and since the beginning of the third quarter, we have lowered total debt by approximately $1.3 billion to $17.4 billion.

"Although demand in the second quarter was dampened by mild weather, especially in April and May, since June we have seen strong demand for electricity and improving spark spreads in our major power markets," Cartwright continued in the release. "Our recently restructured long-term service arrangements with our major equipment manufacturers will advance Calpine's program to lower operating costs, improve plant performance and enhance our major maintenance capabilities."

Calpine also released six-month numbers that included revenue of $4.3 billion, representing an increase of 4.2% over the same period in the prior year, and a net loss per share of $1.04, or a net loss of $467.2 million, compared to a net loss per share of $0.24, or a net loss of $99.9 million, for the same period in the prior year.

Delta plunges

Among the problem-plagued airline carriers, Delta "got crushed yesterday [Tuesday] and got smothered today [Wednesday]," a trader said, with the struggling Atlanta-based carrier's benchmark 7.70% notes due 2005 down 11 points at 39 bid, 42 offered, and its 10% notes due 2008, 7.90% notes due 2009 and 8.30% notes due 2029 all two points lower, at 22 bid, 24 offered, 20 bid, 22 offered and 18 bid, 20 offered, respectively.

Noting that the 7.70s had been dropping much more rapidly than the other bonds, he said "they will catch up - it will take a little while, but they will catch up," and all of the bonds will then trade on top of one another - a sure sign the market sees a bankruptcy filing coming.

Another trader saw the 7.70s fall to 40 bid, 42 offered, from a wide 48 bid, 52 offered on Tuesday. The fall in the other bonds was "not as drastic," with its 8.30s some 1½ points lower at 17 bid, 19 offered.

Yet a third trader saw the 7.70s "absolutely crushed. You're seeing compression across all of the unsecureds at this point."

He pegged the bonds - which "were in the 60s just two days ago" - as having fallen to 39.5 bid, 41.5 offered, a loss of 12 or 13 points on the day, and 22 points over the last two days.

He said that while it would appear that market participants finally believe that the end is near for Delta, "you always think so - but then the airlines have a way of miraculously pulling out of it," such as the way Delta itself barely tap-danced away from bankruptcy last fall by arranging $1 billion of new financing from General Electric and American Express.

This time, however, Delta, the third biggest U.S. airline, may not be able to dodge the bullet. "With oil where it is," above the $60 per barrel level for crude - a leading indicator of which direction jet fuel prices are headed - "I don't see what incentive they have to stay out [of Chapter 11] at this point. I mean they tried - but with the changes in the bankruptcy law that The Washington Post was talking about, and oil and everything - it's just bad news."

On Tuesday, the Post reported that Delta and/or Northwest might duck under the protection of the bankruptcy code sooner rather than later, since recently passed changes making the code less debtor-friendly than in the past are slated to take effect in mid-October.

Northwest lower as well

As for Northwest, A trader said "they're down - but not as bad as Delta." However, he added "there were definitely sympathy pains, with Northwest's 8 7/8% notes due 2006 off five points at 61 bid, 63 offered; its 9 7/8% notes due 2007 four points lower at 47 bid, 49 offered; as were its 10% notes due 2009, at 41 bid, 43 offered.

A second trader agreed that the Eagan, Minn.-based Number-Four U.S. air carrier "also caught the flu," off Delta, and was down in sympathy with Delta for a second straight session.

He saw the 8 7/8s down three points at 61 bid, as "the really short, short stuff for both Northwest and Delta really got beat up."

Another trader declared that "their unions absolutely hate their guts - you never know till the 11th hour, but you get the impression that the Northwest unions are like 'if we go down, we're taking you with us.' There's no good solution for the unions," which are faced with the prospect of big givebacks to Northwest - which now claims to have the highest labor costs of any of the "legacy carriers" and wants $1.1 billion of permanent concessions - or else seeing the airline crash-land in the bankruptcy courts, where the judge overseeing reorganization will have the power to void their negotiated contracts and impose a settlement, while the airline might try to dump their pensions in the lap of the federal government, as bankrupt United Airlines successfully did recently, much to the chagrin of UAL's unions.

"They're dead," he continued "They have no good option available. If they go on strike" - and the clock is ticking on a possible strike by the airlines mechanics any time after Aug. 20 - then I gotta think they'll go BK."

He saw Northwest's 8 7/8s get as low as 61 bid before firming slightly off that nadir to end at 62.5 bid, 64.5 offered, still down about four points, though in "quite slow" trading.

He also saw the airline's 10s, which fell several points on Tuesday, "dropping four more points" Wednesday to 42.

Auto names better

Apart from the airlines, a trader said, the bonds of troubled auto parts and component suppliers continued to steer a higher course, helped by the revival in summer sales seen among Detroit's "Big Three" and reported Tuesday.

He saw bankrupt Troy, Mich.-based automotive interior component maker Collins & Aikman Products Co.'s 10¾% notes due 2011 a point better at 29 bid, 31 offered, while bankrupt Novi, Mich.-based vehicle frames maker Tower Automotive Inc.'s 12% notes due 2013 were two points up at 87 bid, 89 offered. Tower's 5¾% convertible bonds did even better, firming smartly to 36 bid, 38 offered, from prior levels around 30.

On the downside, the 13½% notes coming due later this month issued by troubled Linwood, Pa.-based automotive foam products maker Foamex International Inc., were seen lower, a trader said, falling to a wide 46 bid, 50 offered from 49 bid earlier. And Troy, Mich.-based automotive electronics maker Delphi Corp.'s 6½% notes due 2013 and 7 1/8% notes due 2029 each lost a point, to 79 bid, 81 offered and 73 bid, 75 offered, respectively.

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