Calpine climbs on more buyout buzz, going current on bank paper; Northwest Airlines up, up, away

By Ronda Fears

Memphis, Dec. 11 - Distressed debt players were still in the buying mood in general on Monday, but traders said there was some profit taking in distressed paper that has been trading at a premium to par, such as with Delphi Corp.

Airline paper, particularly that of bankrupt Northwest Airlines Corp., was still hot and headed screaming northward again Monday, up by 6 or 7 points by some accounts, as speculation swirled that it could be eying peer Continental Airlines, Inc.

A couple of power names were hot items, too, including bankrupt Calpine Corp. and Mirant Corp.

Also of note, Granite Broadcasting Corp. caved in to a bankruptcy filing Monday after having warned of such a possibility in mid-November when the New York-based network television stations operator said it did not have the cash to make the $19.75 million coupon payment due Dec. 1 on its 9¾% senior secured notes due 2010 or to repay the $70 million due under its credit agreement.

Granite said after the market closed Monday that it has filed a prepackaged bankruptcy in New York that would reduce debt by more than $275 million to around $230 million, with an exit anticipated in the first half of 2007. A trader said Granite's 9¾% notes were seen on the Trace reporting system off by 3 points on the session at 90.5.

Calpine bonds add 3.5 points

Calpine's bonds were better Monday by as much as 3.5 points as takeover chatter again surfaced, and traders said the arbitrageur bet is that the stock is worth something in such a scenario. Providing an additional lift to Calpine paper was news the company is going current on its second-lien bank paper.

The Calpine 8½% notes due 2011, for example, gained to 80.25 bid, 82.25 offered on Monday from 75.5 on Friday, one trader said. The common shares, which trade on Pink Sheets, rose 7% to $1.07.

"Somebody has been buying quite actively lately. There is heavy buying in the stock, too, and not just short covering," said one bond trader, noting 8.84 million shares traded Monday versus the norm of 5.62 million shares.

"What we have heard is that someone has a $2.75 target on the shares, hitting that by Jan. 19, based on the activity in the calls. Between the calls and the stock's sharp rise, I've a feeling something's quietly percolating beneath the surface with Calpine."

The trader said that while Calpine has made no overtures about a buyout in the works, its 8-K filing on Friday seemed to suggest that the company believes that its common stock has ongoing value.

"If you read between the lines, you could think Calpine is saying the stock won't be canceled when they say 'the tax benefits of keeping the original shares is more valuable.'"

Also, he said investors are looking for Calpine's October monthly report, which is anticipated this week and expected to show a significant gain.

Calpine buyout not difficult

There have been skeptics that Calpine could lure a private equity buyout before the bankruptcy process of weeding out unperforming assets is complete, but one holder Monday told Prospect News that it is not an unreasonable line of thought to see a buyer for Calpine to step up.

"U.S. utilities are cheap for a buyer with foreign currency," the buysider said.

"It is my view that Calpine will be guzzled up by a foreign company. Dubai Investments would have snapped it up as it is contra-cyclical to their main cash cow, oil and gas, but for politics. Also, the European/U.K. currencies are massively over-valued (40%), so watch for something from over there.

"There's also Mitsui & Co. Don't discount these guys for one second. These guys are into everything globally, from subways in Brazil, to oil and gas in Russia, the list goes on and on and on. This is going to be very interesting, when it comes down to the wire."

He sees the move in Calpine bonds and stock directly related to this line of thinking, not short covering although that may play a small role.

"Consolidation in the power sector is huge," the buysider said. "There is huge investment demand from utilities, hedge funds, private equity, investment banks, privates and industry buyers. The stock is a hot item not just for the bondholders, but lots and lots of other outright buyers because of this. I am bullish, but I am confident with the quality of the assets, too."

Calpine bank paper rises

In addition to the bonds, Calpine's second-lien bank debt was on the rise on Monday as the company revealed that it will go current on all its second-lien debt, according to a trader.

The second-lien paper closed the day at 113.5 bid, 114.5 offered, up about a point from previous levels, the trader said.

"They haven't made a payment since June. Now they're going to start paying interest again," the trader added.

In addition, the San Jose, Calif.-based independent power producer filed papers with the bankruptcy court on Friday asking to amend its cash collateral order to allow project inter-company loan transfers and to pay adequate protection to second-lien debtholders.

Under the motion, the company is seeking the immediate release of $258 million for transfer as a loan to Calpine from a project debtor and to facilitate future requests.

Furthermore, Calpine would not be required to draw on its $1 billion revolving credit facility to make adequate protection payments to the Calpine second-lien debtholders, but would be required to use its unrestricted cash to make the payments, subject to a $10 million cushion.

Provided there has been no default or event of default under the company's debtor-in-possession facility, Calpine will pay the debtholders $100.26 million in four equal installments in 2007 on March 31, June 30, Sept. 30 and Dec. 31, for 2006 adequate protection payments.

A hearing is scheduled for Dec. 20.

Northwest bonds hit 96 area

Northwest Airlines resumed its upward path Monday, as expected, with the bonds better by as much as 6 or 7 points, and the stock marked another 16% gain following a whopping 48% spike in the previous session. Adding fuel to Northwest going into play last week, rumors were flying Monday that the bankrupt No. 5 domestic airline may be pursuing a deal with Continental Airlines, Inc.

First thing Monday, Northwest's 7 5/8% notes were catching higher bids in the low 90s, which elicited a "wow" from one trader, who closed the issue at 96 bid, 97 offered. Another trader saw the 9 7/8% notes due 2007 also up 6 points at 98 bid, 99 offered.

At another desk, a trader saw the 10% notes due 2009 at 96.5 bid, 97.5 offered, up from Friday's close of 89.375 bid, 90.375 offered. He attributed the sharp gain to the market's "need to throw money at things."

Northwest shares went along with the party, ending the session at another new high of $5.70 after trading as high as $6.23. On the equity, a stock trader said that "people are still shorting, I think, but there are a lot of buyers around." He noted a mind-boggling 17 million shares of Northwest stock traded Monday, versus the norm of 3.7 million shares.

Many shrugged off chatter last week about a merger of Northwest and fellow bankrupt airline Delta Air Lines Inc., the No. 3 domestic carrier, but on Monday the rumors spread to include Houston-based Continental Airlines, the No. 4 domestic carrier, as perhaps a takeover target of Northwest Airlines and traders said the "market was keen on that notion."

Last week, Eagan, Minn.-based Northwest asked for bankruptcy court approval to hire financial advisory firm Evercore Group LLC to help it evaluate strategic alternatives, including a merger.

"Continental is seen as a likely partner, albeit an unwilling partner," remarked one trader, alluding to comments of that nature from Continental's top executives. He said Continental's bonds were about 2 points better and noted the stock was up Monday by more than 8%.

"From the wording in Northwest's request, it could be looking to be acquired, or to make an acquisition. Either way, Northwest is in play."

Meanwhile, Delta paper was actually pretty quiet Monday, traders said. Ironically, it was US Airways Group Inc.'s $8 billion-plus bid for Delta in mid-November that was largely responsible for starting the run on airline paper.

Delta's bonds were described as firmer by a half-point to a point with the 8.30% notes at 67.5 bid, 68.5 offered and the 7.90% notes at 66 bid, 67 offered. Delta shares, however, were up more than 11.5%.

Delphi drifts lower

Bankrupt auto parts supplier Delphi zigzagged "all over the map" Monday but ended the day off about a point, traders said, as sellers took profits while there remained plenty of buyers willing to pony up a premium price for the bonds.

Delphi's 6.55% notes lost 1 point to 108.5 bid, 109.5 offered, one trader said. Another said the 8¼% notes were seen as low as 102.5 and as high as 106, one trader said, but the bonds ended the session at 104 bid, 105 offered, about where they went out Friday.

The trader noted that there was news out over the weekend that Delphi is at least $1.25 billion behind in required pension funding payments since it filed for bankruptcy, by federal pension regulators' estimates. The Pension Benefit Guaranty Corp., which insures private pension plans for millions of Americans, said Friday that Delphi's pension fund may be under-funded by as much as $10.6 billion.

"An article concerning under-funded pension obligations explains today's sell-off," the trader said. "There are still plenty of buyers, too, though. It's the end of the year and everyone is padding their portfolios."

Troy, Mich.-based Delphi, the largest domestic auto parts supplier, filed for bankruptcy in October 2005. Since then, it has paid $234 million into its pension plan. Former parent General Motors Corp. has been trying to reach an agreement with Delphi and Delphi creditors over GM's obligation to its former parts unit and workers.

Dura 2012s go to 32

Elsewhere in the bankrupt auto realm, Dura Automotive Systems Inc.'s extended recent gains, which one trader attributed to the Rochester Hills, Mich.-based company's hire of former Ford Motor Co. executive David T. Szczupak to be its chief operating officer, effective immediately.

The Dura 8 5/8% notes due 2012 were seen by the trader going to 32 bid, 33 offered on Monday from recent levels in the mid-20s.

Mirant firms on Philippine sale

In another power name, traders said there was some action in Atlanta-based independent power producer Mirant's bonds, moving the paper up, on news that it has sold its Philippine business for $3.79 billion and could be in a position to take out some extra debt in addition to that associated with the Philippine projects.

"They got a good price for the Philippines assets," said one trader.

He pegged Mirant's 8½% notes firmer by about a half-point at 101.5 bid, 102.5 offered and the 9 1/8% notes higher by a point at 106 bid, 107 offered.

Mirant said the sale is expected to generate a pretax $2.2 billion gain, due to net operating loss carryforwards, and close in second-quarter 2007, pending certain conditions. The company plans to repay $642 million in related debt and to use the remaining proceeds for stock repurchases.

"If I'm reading this [Mirant press release] correctly, and if Mirant returns approximately $580 million to working cash on hand, the other share buybacks (in August and September) would be paid in full," a buysider said.

"That would leave approximately, $1.6 billion to be used to satisfy EPA standards, possible further reduction of debt and maybe another shareholder distribution.

"It's pretty good really, and better than it looked on the back of the napkin. Mirant will no longer have these assets, which have been producing a cash flow of some $350 million per year, but it's a good thing."

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