Calpine continues freefall, bonds lose another 2-4 points; Loral sees buyers for preferreds; autos flat

By Ronda Fears and Sara Rosenberg

Nashville, April 25 - Calpine Corp. again was at the forefront of trading in distressed debt on Monday as concerns about the credit steamrolled, spilling over into its upcoming earnings and reported trouble with its power trading business.

Otherwise, distressed debt traders uniformly remarked of a slow session.

However, some onlookers anticipate distressed debt trading will pick up remarkably in the second half of 2005. Speaking of pick up, the auto sector is expected to be a focal point for increased business on the distressed debt trading desks.

"GM and Ford, of course, are not distressed but they are driving more distressed debt business in the auto suppliers group," said one source at a shop that handles a lot of distressed paper. "We are expecting distressed trading to pick up in the second half, and it will be a whole new crop of names."

As a group, though, the auto supplier names already in play in the distressed debt market were quiet on Monday, traders said.

Trading was minimal in Adelphia Communications Corp., too. The company reported to the bankruptcy court that its net loss in March rose to $23.86 million, but the cable company's debt remained steady in the 90s, traders said, on last week's news of a definitive merger agreement with Time Warner Inc. and Comcast Corp. for an estimated $18 billion.

Aerospace concern Loral Space & Communications Ltd., another bankrupt name, however, was still seeing buyers step up following news last week that its patent dispute with aerospace and defense giant Lockheed Martin Corp. is still alive.

Calpine loans fall 2 points

Basically, traders said the ongoing sell-off in Calpine paper reflects a lack of risk tolerance as well as a lack of faith in company management to deal with its massive debtload. In addition to the bonds slipping further, the bank debt also continued moving southerly.

"If the reports are true, and really despite what the company says, it makes more sense that power traders are not wanting to do business with them because of all the noise last week, then the house could come crumbling down around them [Calpine management]," said a distressed debt trader.

He cited a Reuters report Monday that quoted a power trader early Monday as saying that there was some reluctance to deal with the San Jose, Calif., independent power producer. According to the report, a Calpine spokeswoman said "the false rumors have not impacted our trading operations."

In any event, another bond trader said there continues to be extreme anxiety about Calpine's earnings, which are due to be reported May 5. For fourth quarter, the company posted a net loss of $172.8 million, or 39 cents per diluted share, versus a year-earlier profit of $119.6 million, or 29 cents a share. For 2004, the company posted a net loss of $221.2 million, or 51 cents a share, versus a 2003 profit of $282 million, or 71 cents a share.

On Monday, Calpine's 8½% bonds due 2008 lost another 2 to 4 points from Friday levels. That issue was pegged at day's end at 55½ bid, 56½ offered, versus being seen at the close Friday at 59½ bid at one shop and at 57½ bid at another.

The bank debt continued to lose ground, too, with the Calpine Corp. second-lien loan at 75 bid, 77 offered, "off of the lows but still off a couple of points down on the day," as one bank debt trader put it.

Calpine dominated activity in the distressed market Friday amid chatter reverberating throughout the markets that the company had hired bankruptcy counsel. The company denied what it referred to as "false" rumors, which helped stem the selling tide, but Calpine paper still ended the day sharply lower.

Auto supplier paper idling

The auto supplier paper adrift in the distressed debt markets currently remained stalled in activity Monday, but traders anticipate more traffic from that sector, as a group, later this year as weakness at Ford Motor Co. and General Motors Corp. will trickle down the supply chain.

A source at a shop that handles a lot of distressed paper said his firm is particularly expecting auto supplier paper as a source of additional business in the second half of this year, but he did not mention any specific names.

Rather, he said the auto supplier paper that is in trade on distressed desks - from Collins & Aikman Products Co. and R.J. Tower Corp. - remained "stuck" Monday at last week's levels. Collins & Aikman's senior notes, the 0¾% notes due 2011, were at 77 bid, 79 offered and the R.J. Tower bonds at 54 bid, 55 offered.

An analyst at another shop speculated that Visteon Corp. might be a name that could fall onto the distressed desks, noting that on Friday Moody's Investors Service cut the credit deeper into junk territory. Moody's also was keeping Visteon credit on review for further possible downgrade, citing delays in efforts to reach a restructuring agreement with Ford as well as a decrease in business volume.

"I think there could be a catalyst there [for Visteon] but, then, Ford is doing better than GM these days, so maybe they get turned around, too," said the analyst at a West Coast office of an international bank.

Sources in the high-yield market have remarked for most of April about Visteon, a former Ford unit, bonds being on a downward path. The 8¼% notes due 2010 were seen firming earlier this week to the 85½ area, down from the 94¾ area earlier this month; the 7% notes due 2014 edged up to the 76 area earlier this week but are down from 84 previously.

In addition to Visteon, the analyst said Dura Automotive Systems Inc. may be another name for distressed debt fund managers and investors to watch.

Loral preferreds up to 4½

Eyes were skyward, so to speak, regarding Loral Space & Communications. There wasn't a huge lift in the credit, but a trader remarked that the Loral preferreds continued to see buyers on Monday following positive news from last week.

The Loral 6% preferreds were up "a dime" on Monday, the trader said, to 41/2. He said there had been buying in the issue on Friday as well.

Impetus for the buying interest, he said, came in the way of news out of the bankruptcy case.

On Wednesday, Loral won an appeal that reinstated its patent violation suit against Lockheed Martin Corp. At issue is a claim that Lockheed violated the patent for a technology that keeps a satellite in orbit longer by boosting the efficiency of thruster-firings that maintain orientation and altitude.

The battle may be far from over, however, as Lockheed Martin has indicated it disagrees with the ruling.

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