Short covering bumps Calpine; Dycom sells $150 million; market drops on raw materials, energy woes

By Paul A. Harris

St. Louis, Oct. 4 - The high-yield market was said to be a quarter-point to a half-a-point weaker on Tuesday, according to various sources, who noted that credits with significant exposure to raw materials shortages and high energy prices generally appear to be bearing the brunt.

Meanwhile a downsized-but-completed preferred deal by Calpine Corp. subsisidary CCFC Preferred Holdings was said to have set off a stampede of short covering on the Street.

And Dycom Industries did a $150 million junk bond deal that priced at the wide end of price talk, while Roundy's Supermarkets Inc. announced a $325 million offering in two parts.

Calpine way up

The story of the session on Tuesday was Calpine, sources insisted.

The company's existing paper - especially the 8½% bonds due in 2008 - got a major boost as the two week-plus odyssey of a preferred deal came to a happier ending that players may have been anticipating.

Calpine subsidiary CCFC Preferred Holdings, LLC, priced a downsized $300 million issue of six-year redeemable preferred shares on Tuesday, with a dividend that floats at Libor plus 950 basis points.

Morgan Stanley ran the books.

The deal was reduced from an originally announced amount of $400 million.

One trader commented that the completed transaction may have taken some investors by surprise.

"The company wanted to get $400 million done," the trader recounted. "The market offered them a $300 million deal and the company walked away from it and went out to the rest of the market where people were telling them they could get $400 million done.

"The market fell on its face and the company went back to Morgan Stanley and said 'We'll take the $300 million.'"

The trader recalled that a little over a week ago Calpine's 8½% bonds due in 2008 were as low as 56.00 bid, whereas Tuesday they were up to about 66.00 bid.

"There are a lot of shorts in this bond. There is a lot of leveraged money in this capital structure. So when this thing moves it trades at a beta of about three to the market," the trader commented.

"When the preferred deal got pulled a couple of weeks ago these bonds were down 15 to 16 points in a day. There is a lot of volatility. Everybody on Wall Street is short this entire capital structure except for the first lien."

Another trader, commenting that the paper had come off toward the end of the day, said the 81/2s due 2008 opened 65.0 bid, 66.0 offered, traded up to 67.0 bid, and closed 55.50 bid, 56.50 offered.

The trader also saw swings in Calpine's 8½% notes due 2011, which opened at 55.00 bid, traded up to 60.0 bid, and closed at 58.0 bid.

This source also saw some of Calpine's 4¾% convertibles due 2023 as high as 62.0 bid, and as low as 58.50 bid.

Raw materials pinch tugs at Goodyear

Elsewhere in the secondary market, Goodyear Tire & Rubber Co., said to be suffering from a raw materials supply disruption in the wake of Hurricane Rita, saw its paper trade down on Tuesday

One trader recounted that Goodyear called a "force majeure" Monday night on some of its contracts because of the shortage, and spotted the company's 9% notes due 2015 down a point at 98.50 bid from 99.0 bid on Monday.

The trader said that raw materials disruptions were impacting the metals sector, which had been holding in firm.

The trader added that although steel bonds have generally been holding in, Novelis Inc.'s paper has "dropped half a point a day for the past week or so."

The source said Novelis bonds had opened up Tuesday at 95.25 bid, 96.25 offered, and closed with a little better bid, around 96.50.

"AK Steel and U.S. Steel bonds hanging in there," the trader said, adding that Century Aluminum Co.'s bonds were unchanged to a little better on the day at 103.50 bid, 104.50 offered.

"Raw materials concerns seem to rotate through a sector," the trader observed.

"It really depends who is putting news out that day.

"It's just a weak market right now."

The source began recounting junk's present list of woes, starting with the $1.3 billion outflow from the high-yield mutual funds for the week that ended Wednesday, Sept. 28, as reported by AMG Data Services.

Add to it a possible "double-notch downgrade for GM, and another $80 billion coming into the junk sector," the source said.

"That's putting pressure on our market."

Dycom brings $150 million at wide end

The primary market saw terms emerge on a single transaction Tuesday.

Dycom Industries priced a $150 million issue of 10-year senior subordinated notes (Ba3/B+) at par on Tuesday to yield 8 1/8%, on the wide end of the 8% area price talk.

Merrill Lynch & Co. and Goldman Sachs & Co. were joint bookrunners.

Elsewhere Roundy's Supermarkets Inc. said that a roadshow for a $325 million two-part offering of high-yield bonds is expected to launch in the next two weeks via Bear Stearns & Co. and Goldman Sachs & Co.

The debt refinancing and dividend funding deal will feature $175 million of seven-year floating-rate senior notes and $150 million of eight-year senior subordinated notes.

2005 - the black or the red?

As it has been doing for the past week or so, Prospect News continued on Tuesday to quiz its sources as to whether the high-yield market will end 2005 with positive or negative returns.

Noting that the various indexes have the market trading in the mid-single digits to the low twos, most sources have been favoring a slightly positive return.

"Typically October is a pick-up from September," an investor said.

"November, on the other hand, is one of the strongest months of the year in high yield, before December quiets down.

"I think we will have a positive year.

"Everybody is expecting Delphi to file for bankruptcy. If it doesn't that will be a psychological prop.

"The economy, while it has been affected by the energy crisis, seems to be doing alright. There is a lot of stuff underneath that seems to be doing good. That's one of Greenspan's reasons for continuing to raise rates. Everybody expects that to continue, and if it does, okay.

"The one problem could perhaps be $20 natural gas this winter. That would make heating homes incredibly expensive in the northeast, which could make for a really bad Christmas."

However late Tuesday a junk bond trader seemed to think 2005, positive or negative, is just too close to call at the present.

"I kind of wonder what's held it up for so long," said the trader.

"If rates continue to go up, and you continue to have these problems with people having margin pressure on their businesses, it's quite possible that it will end with a negative return - particularly if you see a reallocation of funds out of high yield and into equities."

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