Calpine mega-deal prices, fizzles in secondary; funds see $223.8 million inflow

By Paul Deckelman and Paul A. Harris

New York, July 10 - Calpine Corp.'s long-awaited and eagerly anticipated multi-part mega-deal priced on Thursday, its combined size of $2.55 billion of new fixed-coupon and floating-rate bonds making it among the biggest single junk bond deals ever.

But for all of the anticipation, the California-based power producer's new paper failed to generate much in the way of interest in the secondary market, breaking below par and staying there for the rest of the session.

But if the market felt heavy and dragging, as traders said Thursday, it still got some good news after hours, as market participants familiar with the weekly mutual fund flow statistics compiled by AMG Data Services of Arcata, Calif. told Prospect News that in the week ended Wednesday, $223.8 million more left the funds than had come into them, excluding distributions and counting only those funds which report on a weekly basis.

It was the first inflow in the past three week, following two straight weeks of outflows which had totaled approximately $321.5 million, including the $144.3 million leakage seen last week.

Including the latest week's data, inflows have now been seen in 19 of the 27 weeks since the beginning of the year, for a healthy cumulative infusion of approximately $16.103 billion, according to a Prospect News analysis of the AMG figures.

The weekly mutual fund flow numbers are regarded by many market participants as a reliable barometer of overall junk market liquidity trends.

For most of this year, including an incredible 12-week winning streak that occupied most of the spring - and indeed, even stretching back to last year's fourth quarter - the market has generally seen week after week of inflows - some of them more than $1 billion - punctuated here and there by a week or two of generally modest outflows.

Analysts credit the rush of new money into the funds (and by extension, into the market from other sources besides the funds as well) with being the catalyst for both a sharp upturn in trading for existing bonds, and a positively sizzling primary market, which saw $69.285 billion of new paper pricing in the first half of the year alone, according to Prospect News data - more than the $59.6 billion that priced all of last year. The easy liquidity has even cleared the way for gigantic issues well in excess of $1 billion - including Thursday's three-part offering by Calpine.

While buzz about San Jose, Calif.-based Calpine dominated the high yield circuits Thursday, the power company's offering had already begun to generate chatter on Wednesday when it became known that it had amplified its previously announced $1.8 billion bond and bank refinancing deal to an even $3 billion.

As sources had advised Prospect News that it might, Calpine turned up the juice even further on Thursday, completing $3.3 billion, of which $2.55 billion came in fixed- and floating-rate bonds.

The company sold $1.15 billion of seven-year fixed-rate notes at par to yield 8½% (price talk was 8¼%-8½%) and $900 million of 10-year fixed-rate notes at par to yield 8 ¾% (price talk was 25 basis points behind the seven-year notes). Calpine also sold $500 million of four-year floating-rate notes with an interest rate of Libor plus 575 basis points in line with talk.

In addition Calpine also completed a $750 million term loan which priced at Libor plus 575 basis points and was marketed to high yield accounts and hedge funds.

Goldman Sachs & Co. was the bookrunner.

One source told Prospect News that there were $5 billion of orders in the book for Calpine's fixed-rate notes, and $3 billion for the floaters.

Another source, alluding to reports that the new bonds eased somewhat when released for trading in the aftermarket, noted that those oversubscription figures, when viewed as dollar amounts, looked impressive, but that as multiples of the offering they were altogether more digestible.

Yet another sell-side source told Prospect News that the size of the Calpine deal speaks for itself.

"They have so much debt outstanding that a lot of guys are rolling," commented this official, who added that such investors were "picking up security" with the new notes.

"And since everyone is talking about the name, everyone wants to trade the name," added the source. "So you're getting guys who are diving in for those purposes as well."

Calpine said it would use proceeds to repay bank debt and buy back notes and announced Thursday that as part of the new financing it would buy back $573.1 million face value of outstanding senior notes at a cost of $504.6 million.

In addition to Calpine, one deal - an LBO deal - priced Thursday in the eurobond market. Teksid SpA priced an upsized €240 million of eight-year senior notes (B2/B-) priced at par to yield 11 3/8%, via JP Morgan. The deal was increased from €225 million.

The Barcelona, Spain-based producer of metallurgical products for the automotive industry priced its notes at the inside end of the 11½% area price talk.

Details emerged Thursday on an expected offering from U.S. Can Corp. The Lombard, Ill.-based producer of steel containers expects to price $125 million of seven-year non-call-four second priority senior secured notes (B3) in the middle of the July 14 week, although details on the roadshow timing remained to be determined as Prospect News went to press on Thursday. Citigroup will run the books on the deal, which will be issued through the company's United States Can Co. subsidiary.

News also circulated the market Thursday on the pending transaction from Bellevue, Wash.-based Western Wireless Corp. The company dropped an announced tranche of seven-year non-call-four notes, and now intends to price $600 million of 10-year non-call-five senior unsecured notes (Caa2/CCC). Price talk is 9¼%-9½% on the deal, which is expected to price Friday via Goldman Sachs, JP Morgan and Wachovia Securities.

As it happens, Western Wireless is the only remaining deal on the forward calendar that is expected to be completed before the end of the July 9 week.

One sell-side source told Prospect New on Thursday that it is somewhat surprising that companies which have already expressed their intentions to tap the high yield market - deals that have been parked on the so-called "shadow calendar" of companies not yet actually "in the market" - have not been formally launching their offerings.

Mentioning expectations that "a retail name and a media name" are expected to appear soon (although declining to be more specific) this sell-side official told Prospect News Thursday that one pending transaction is well worth keeping a close eye on: Columbus McKinnon Corp.'s $100 million of seven-year non-call-four senior secured notes (B3/B-), which this source expects to price next Tuesday or Wednesday, via Credit Suisse First Boston.

"I expect that people might start coming if that execution goes well," the official said.

"It's a very small company that has had a lot of past problems," the source added. "They're in the trough right now, and the question is, are they going to be coming up or staying in it?

"It's a very small issue from a very small company, and it's an industrial name. If it gets done at a reasonable rate, which is probably going to be somewhere in the 11s, I think all these other companies are going to be flocking to do the same thing," the sell-side source added.

"For anyone who has accessed the private junior capital market over the last year or so it would mean that they now have the opportunity to get out of that debt, which is much more expensive than high yield. And it's callable."

When the new Calpine bonds were cleared for secondary trading, market participants said, they quickly lost power.

One trader said that both the 8½% second priority senior secured notes due 2010 and the 83/4s of 2013 broke at 99.25, below their par issue price and never got above 99.75 on the session.

"A couple of accounts -not dealers, but accounts - came in to support the deal," he observed.

He noted that the seven year note seemed to be more favored among those who were playing in the deal, while the 10-years were "a little less strong" than their companion issue.

Another trader quoted the two fixed-coupon bonds as closing at 99 bid, par offered, while the floaters went home at 99.75 bid, 100.25 offered.

At another desk, a trader noted that the new Calpines were finishing below par and opined that "it did weigh on the market. Not that it's a substantial discount [from the issue price]. But the market just felt heavy."

"This was particularly true of Calpine's existing bonds, which had firmed smartly over several recent sessions, particularly on Wednesday, amid news that demand for the new bonds had pushed the total financing size to $3 billion from $1.8 billion originally, with the bond component over $2 billion from $1.2 billion initially.

But on Wednesday, the trader said the existing issues "felt pretty heavy," down at least three-quarter points to a full point.

A market observer quoted Calpine's benchmark 8½% notes due 2011 as having fallen to 81.5 bid, a two-point drop from Wednesday's levels.

"Some people did some front-running [in the existing bonds] going into the buybacks," another trader said (he noted that there had been some swapping out of the old bonds and into the new ones). "They pushed them up, got stuck with them - and then pushed them right back down."

Elsewhere, the trader said, bonds of companies with asbestos liability exposure were weaker, on reports that the Senate Judiciary Committee may not be as close to coming up with an agreement on a legislative solution to the asbestos liability problem as everyone had thought.

Organized labor wrote to senators expressing new concerns about the bill sponsored by Sen. Orrin Hatch ( R-Utah), which would set up a $108 billion trust fund financed by companies and the insurance industry to handle future claims; the AFL-CIO and other critics contend the bill is aimed more at indemnifying industry from claims beyond that $108 billion level than it is at providing a mechanism through which people suffering medical problems or having the potential to develop asbestos-related illnesses can be compensated.

Hopes that the two sides might be close to a bipartisan agreement on a bill had recently helped to boost the shares and bonds of such asbestos-challenged companies as Georgia Pacific Corp., Crown Cork & Seal Co. Inc. and, Owens-Illinois Inc., as well as companies driven into bankruptcy by asbestos concerns, such as Owens-Corning Corp., Federal Mogul Corp. and Armstrong World Industries.

But news of the legislative quagmire in the Judiciary committee, as well as news that the full senate had narrowly defeated a Bush administration initiative toward medical malpractice tort reform - seen as a bearish harbinger for any asbestos bill's prospects - helped push the bonds down on Thursday.

"After the news that they couldn't agree on the asbestos claims came out, Georgia Pacific bonds were all down about a point," a trader said, even though there was not much activity in them." He also saw bonds of other asbestos related companies such as Crown Cork and Owens-Illinois "all down half a point to a point."

"The news hit the market and equity got hurt as badly as the bonds, probably even worse," said another trader, who noted that something like 60 U.S. companies had been driven into bankruptcy over the issue - many of them companies which themselves never manufactured asbestos or any products such as brake linings or insulation for which it used to be used, but which years or sometimes even decades later bought the former asbestos producers, and found themselves now holding the bag.

"They've got to get this under control," the trader said. "The way things stand right now, the people with claims are getting a pittance - and only the lawyers are getting rich."

A market source saw Owens-Corning's bonds "down significantly, maybe three or four points" on the news that the legislators were roadblocked. The source quoted the Toledo, Ohio-based insulation maker's 7½% notes due 2018 at 47.5 bid, 48.5 offered. Its 7.7% notes due 2008 were at 46.75 bid, 47.25 offered.

On the upside, Charter Communications Holdings Inc.'s bonds - which had risen solidly on Wednesday - continued to firm on Thursday, possibly on what were described by one market source as rumblings around the market that Charter may do some sort of convertibles deal - with some speculation putting the deal as big as $1 billion. The source said that given the St. Louis -based cable operator's well publicized problems, it would be "a very bullish sign" if it could access the capital markets. Charter's 8 5/8% notes due 2009 were heard up a point at 77.5 bid

Bonds of The Gap were heard firmer, its 6.9% notes due 2007 up a point at 108, after the San Francisco-based apparel retailer reported a 10% rise in comparable store sales from year-earlier levels as it continues a bounceback from its formerly troubled performance that's been going on since last fall. Analysts had only been looking for a gain of less than 8%.

And "there was a lot of action in Levis," a trader said, noting that the bonds of the San Francisco-based blue jeans maker have been "going up every day." In Thursday's dealings, he saw its 11 5/8% notes due 2006 having firmed to 93.5 from 92 bid, its 7% notes due 2006 rising to 87 bid from prior levels at 84 bid, 85 offered, while its 12¼% notes due 2012 improved a point to 89 bid.

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