Calpine, Refco, packaging names pull market down; Polypipe talks two-part £185 million in quiet primary

By Paul A. Harris

St. Louis, Oct. 19 - The high-yield market saw isolated pockets of trading activity during the Wednesday but few of them were happy ones.

The junk market was bullied by sell-offs in the bonds of Calpine Corp. and scandal-ridden Refco, Inc., as well as by a conspicuous retreat in packaging names.

One trader said the market was down by half a point to a whole point.

Another trader more or less concurred with that assessment.

"When you factor in the weakness in packaging and Calpine, the market was down half a point to a point," the trader said, adding, however, that nothing really traded except for packaging, Calpine and Refco.

Meanwhile the primary market maintained its sentinel silence as no issues priced during the session.

Calpine - a case of the jitters?

San Jose, Calif., power producer Calpine, whose bonds sold off Tuesday after the New York Post reported that the troubled company had retained the bankruptcy and restructuring law firm Kirkland & Ellis, continued to come under pressure on Wednesday.

One trader spotted the company's 8½% notes due 2008 lower in the afternoon, and "down around four points on the day, trading around 55 bid, on bankruptcy jitters."

Another trader spotted the same bonds at 55.50 bid, 56.50 offered, off from 58.25 bid in the morning.

Specifying that the paper was off 3.75 on the day the trader remarked that the bonds were in the low 60s earlier in the week.

"They're probably buying back bonds again, like they always do," the trader commented on Calpine.

"Every time the bonds slump they come in and buy some."

Having said that, however, the trader began reciting a list of the company's travails.

"The have a credibility issue with management," said the trader. "They're in a lawsuit to recover the $400 million in escrow with [Bank of New York], and they probably need that money. They sold off their natural gas assets. And then you have the New York Post article.

"People may be wondering how many options this company has left if their business model is upside-down."

Meanwhile a buy-side source seemed to consider the trader's bond buy-back scenario at least plausible.

This investor said that a press release that Calpine issued late Tuesday, confirming that it had indeed retained Kirkland & Ellis - "a long-time advisor" - may have been intended by the company to "quell market rumors that may be placing unwarranted pressure on Calpine's equity and bond securities."

However, the investor added, that is not the effect that the press release seems to have had.

"It was really odd," the buy-sider said. "The New York Post writes that Calpine has hired bankruptcy counsel. Calpine comes out with a few sentences saying that [Kirkland & Ellis] is a longstanding counsel, and that [Calpine] felt compelled to respond.

"But that's not responding," the buy-sider asserted. "They didn't actually deny that they were talking to somebody on the bankruptcy side.

"The whole thing is weird."

Refco slips

In a market that "opened weak and was basically heavy all day," one trader said that "the Refco situation" continues to dominate high-yield trading.

The trader said that Refco bonds traded in the mid-50s throughout the day, and closed in the low 50s trailing Tuesday's news that Refco would sell its futures business to J.C. Flowers.

"Every time there is a new story the bonds move up or down a couple of points," the source added.

Another trader saw Refco's 9% bonds due 2012 going out at 54 bid, 55 offered and added: "I've heard that everything from 55 to 75 cents on the dollar is the ultimate workout on this, but there are still some moving parts.

"It seems like every time there is news everybody tweaks their recovery model, which moves the market up and down."

Woeful day for packaging

The third member of Wednesday's woeful triumvirate in junk land was the packaging sector.

Traders selected various predicates - one said "crushed," while another simply opted for "killed" - for their color on the day's trading in the sector's bonds.

In particular it was the Pliant Corp.'s zero coupon/13% notes due 2010 that got crushed, one trader said, adding that the distressed packaging company's paper was off six or seven points on the session.

"They were trading mid-to-high 20s on Tuesday," the trader commented. "On Wednesday a 25 bid got hit, then a 23 bid got hit. Then I saw a lot of bonds trade at 19."

Another trader saw the Pliant zeros trading at 15 bid, 17 offered, and that the rest of the company's bonds are down as well.

There was also weakness in the bonds of Solo Cup Co., which one trader marked "down a couple of points," late Wednesday.

The trader said that Solo Cup's 8½% notes went out at 81.50 bid, 82.50 offered.

They trader added that those notes were down at 75 bid, 76 offered a week ago "when the market was at its weakest," then bounced back to 82 bid, 83 offered.

"They got covenant waivers," the trader explained. "But this company is heavily leveraged, and it continues to languish because they can't pass price increases along to customers.

"That's eventually going to catch up with these guys."

Another trader had Solo Cup's paper finishing Wednesday at 82 bid, 83 offered, "off a point from Tuesday."

Also off were the bonds of Graphic Packaging International Inc., which closed Wednesday 90.75 bid, 91.75 offered after having traded as high as 92.50 earlier in the day.

The trader also marked the bonds of pharmaceutical packaging firm Tekni-Plex, Inc. "down a point or so" on the session.

However when pressed for color on this notable decline in the fortunes of the packaging sector's debt neither trader felt capable of offering anything persuasive beyond the one-two punch of rising energy prices and disruptions in the raw materials pipeline set in train by Hurricane's Katrina and Rita that devastated the U.S. Gulf Coast in the late summer.

Airlines hanging in

On a more buoyant note the paper of the airlines sector appeared to maintain its altitude during the mid-week sector despite the fact that AMR Corp., the parent of American Airlines, reported a third-quarter loss on Wednesday.

A trader had AMR's benchmark 9% bonds due 2012 spotted at 68 bid, 69 offered, unchanged on the day.

"The numbers were horrible, and the guidance for the fourth quarter was horrible too, but the company telegraphed that they would be," the trader commented.

"On the earnings call they said that they found some cost cuts that they could make, and they think they have some projections for increasing revenue.

"Once the call started the stock went back up again. It was down 50 cents for a while."

Elsewhere in the sector the bonds of Northwest Airlines Corp. were seen at 28.50 bid, 29.50 offered, "probably up half a point," a trader said.

And the bonds of Delta Air Lines were "hanging in" at 18 bid, 19 offered, the trader added.

Primary hibernates

The only shred of news that came out of Wednesday's primary market came from Doncaster, England building products manufacturer Polypipe Holdings plc, the parent of Polypipe Inc., which issued price talk on its £185 million two-part offering of high-yield notes.

Polypipe talked its £110 million tranche of six-year senior secured first-lien notes (B) at 7½% to 7¾%, and its £75 million tranche of eight-year senior unsecured notes (CCC+) at 9½% to 9¾%.

Pricing is expected on Thursday via Deutsche Bank Securities.

An investor told Prospect News that junk seems to presently be in a "wait-and-see" mode.

"You have constant outflows," the source said, making reference to the approximately $10 billion of negative flows that have impacted high-yield mutual funds thus far in 2005, according to various market sources.

"You don't have much of a new issue calendar," the investor added. "You have people trying to recover from Delphi, looking at the hurricane [Wilma] and wondering whether Calpine is the next shoe to fall.

"Of course the bank loan market has good technical support, in the CLOs. But those technicals don't exist on the high yield side, basically.

"November is a strong season in the high yield," the source said.

"Everybody's on the sidelines waiting for it to kick in."

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