Calpine continues retreat on court ruling, Six Flags off on Red Zone victory claims; Gibraltar prices

By Paul Deckelman and Paul A. Harris

New York, Nov. 23 - Calpine Corp.'s subordinated bonds continued to fall back on Wednesday in the wake of Tuesday's ruling by a Delaware state court barring the San Jose, Calif.-based power generating company from using proceeds from a recent asset sale to buy natural gas for its plants and directing that it repay money already spent in that manner.

Elsewhere, Six Flags Inc.'s bonds were seen down a point or so amid the uncertainty caused by dissident investor Daniel Snyder's claim that he had won the backing of a majority of the company's shareholders for his efforts to oust chairman and chief executive officer Kieran E. Burke and two other directors, and current management's refusal to admit defeat, pending the outcome of an audit.

Overall a source marked the broad market unchanged on very low volume at the end of Wednesday's abbreviated pre-Thanksgiving session.

It was also a light news day in the primary market with one transaction getting done. Gibraltar Industries Inc. was heard to have successfully priced its issue of 10-year bonds during the abbreviated pre-holiday session.

Participants saw most dealings in both the primary and the secondary arenas wrapped up well before the official 2 p.m. ET close Wednesday, ahead of Thursday's Thanksgiving Day full market closure and Friday's lightly attended half-session.

Three-day week tops $3 billion

Gibraltar priced a $200 million issue of 8% 10-year senior subordinated notes (Ba3/B+) at 98.325 to yield 8¼%, at the wide end of the 8% to 8¼% price talk.

JP Morgan ran the books for the debt refinancing deal from the Buffalo, N.Y., building products company.

The Gibraltar deal closed out the three-day pre-Thanksgiving week with slightly less than $3.3 billion of issuance in 11 dollar-denominated tranches. No activity is expected in Friday's half session.

That tops the previous week's $1.67 billion in nine tranches.

Year-to-date issuance following the Wednesday close stood at just under $91.5 billion in 355 tranches, far short of the close on Nov. 23, 2004, by which time the new issue market had seen $127.3 billion in 511 tranches.

Cleared out calendar

The forward calendar carries a very slight amount of business across the Thanksgiving time line. Interestingly, of the three deals that are considered to be in the market, all come from non-U.S. companies.

For the week of Nov. 28 two deals appear possible, sources say.

Most probable among them is Indonesian coal mining company PT Adaro's $300 million offering of five-year senior secured notes (Ba3), via Goldman Sachs and JP Morgan. The deal is being marketed to investors in Asia and Europe, as well as in the United States.

Also possible as Nov. 28 week business is the approximately €1 billion of expected issuance from Hanover, Germany-based tourism group TUI AG. The acquisition deal is being led by Citigroup, Deutsche Bank Securities, HVB and The Royal Bank of Scotland.

For the following week Macau-based Galaxy Entertainment Finance Co. Ltd. is expected to price a $500 million two part transaction via Merrill Lynch and Morgan Stanley.

An environment for higher rated deals

A buy-side source told Prospect News on Wednesday that the market anticipates a somewhat moderate post-Thanksgiving build up of the forward calendar.

This source said that there is certainly a bid at present for double-B rated paper. The lower-rated bonds, the source added - especially those notes that have triple-C ratings from at least one ratings agency - will not likely be warmly received.

The source added that one highly anticipated deal which is expected to be completed in the run-up to Christmas is Hertz Corp.'s $3.05 billion of bonds via Deutsche Bank Securities, Lehman Brothers, JP Morgan, Goldman Sachs and Merrill Lynch.

With the $3.6 billion bank deal set to launch Tuesday the bonds are expected to follow soon, the bonds are expected to follow soon.

Gibraltar up in trading

When the new Gibraltar 8% senior subordinated notes due 2015 were freed for secondary dealings, the bonds were quoted at 99.5 bid, 100 offered, up from their 98.325 issue price earlier in the session.

Traders also saw Network Communications Inc.'s new 10¾% senior notes due 2013 at 98.625 bid, 99.375 offered, little changed from their late-Tuesday 98.691 issue price.

Elsewhere among recently priced issues, Chaparral Energy Inc.'s new 8½% senior notes due 2015, which priced Tuesday at par and then firmed about a point in initial aftermarket dealings, edged slightly higher Wednesday to bid levels around 101.25.

And Tronox Worldwide LLC's new 9½% senior notes due 2012 were seen at 102.25, up from the 101.5 bid, 102 offered price seen on Tuesday and well up from Monday's par issue price.

Calpine unsecured debt sinks

Back among the established issues, Calpine's unsecured bonds were seen to have moved further down in the wake of Tuesday's ruling in the Delaware Court of Chancery, which rebuffed the company's effort to force the collateral trustee for several issues of its secured bonds, Bank of New York, to grant Calpine access to the remaining $400 million of proceeds from the sale earlier this year of its natural gas assets to the newly formed Rosetta Resources Inc.

The sale of the gas assets to Rosetta, announced at the end of June, produced $1.05 billion of net proceeds to Calpine, which used a small portion of the money to buy back some of its first-lien debt, and which then used $313 million to buy natural gas needed to run its plants. Ironically, the company's gas purchases came at a time when natural gas prices had risen to around $11 per million Btu - well up from the levels between $7 and $8 per million Btu at which gas was selling for at the time of the Rosetta transaction, which formed the basis for its valuation.

Although Calpine said that this gas purchase was a permissible "investment" of the proceeds under the terms of its bond indentures, some bondholders who wanted the money put to debt repayment disagreed, and convinced Bank of New York to freeze the remaining funds in the escrow account and to demand that Calpine restore the $313 million. Calpine challenged that action - but lost.

On Wednesday, a trader saw the company's 8½% notes due 2008 drop to 38 bid, 40 offered from prior levels at 40 bid, 42 offered, and saw the company's 7¾% notes due 2009 backtrack to 36 bid, 38 offered from 38 bid, 40 offered at the close Tuesday.

Another trader said that Calpine was "the only thing that looks like it's trading at all," and characterized it as "looking a little weaker." He quoted its 8½% notes due 2011 down three points on the session to 32.5 bid, 34.5 offered, while a little closer in its 7 5/8% notes due 2006 had slid to 58 bid, 60 offered from 61.5 bid, 63.5 offered previously.

"Calpine was not doing so good," he said, with a considerable degree of understatement. "The stock got cut by a few places [Wednesday], and they got put on negative watch by S&P. I don't know how they'll get out of this mess."

Calyon Securities, for instance, downgraded the company's shares Wednesday to "neutral" from "buy" previously, citing the impact of Tuesday's ruling.

Standard & Poor's, meanwhile, said on Tuesday that the Delaware decision "materially harms the company's weak liquidity profile," although the ratings agency did acknowledge that Calpine's "significant cash balance and its ability to generate cash from the sale of gas assets in storage should allow the company to meet the potential liquidity demands arising from the lawsuit."

However, it added that "[m]ore importantly, the court decision heightens concerns about Calpine's ability to sell or monetize assets so that management can execute its delevering plan."

S&P analyst Jeffrey Wolinsky warned that of particular concern "is the effect of the court's decision on Calpine's ability to monetize portions of the Geysers facility to meet its liquidity needs."

With such problems the trader continued, "this company is toast, between the delayed asset sales" - Calpine, observers said, had held off on the sale of some other non-core assets pending the resolution of the Delaware case - "and their liquidity situation [since] the market is completely shut to them; they can't even do any funky preferreds anymore."

He also noted "their upside-down operations - their [quarterly] numbers stunk" - in asserting "I think they're done - but who knows?"

Another trader said that Calpine "took their dip [Tuesday], and were down a little more [Wednesday]," with the 8½% 2011s at 33 bid, 35 offered.

"The 11s, and the [8½%] '08s were down two points across the board. Those are the best barometer of how Calpine trades, with the 11s definitely the benchmark."

He agreed with the observation that the bonds were starting to converge at those lower levels - usually seen by the market as a sign that the end may not be too far off.

"They're getting there, where they'll all trade on top of each other, though you still have about eight points between the '08s and the '11s."

Subordinated bond investors were not the only ones dismayed by Tuesday's ruling. In a research note on Wednesday, CreditSights Inc. likened Calpine's situation to the children's party game of musical chairs, opining that no one "wants to be the one without a chair if the music stops, and [Tuesday's] Delaware court ruling makes that possibility much more likely."

The ruling by the Chancery court "is unlikely to be overturned on appeal," lead analyst Dot Matthews wrote. It complicates the relationship between the company's first- and second-lien bonds "and makes it much harder for cash-strapped CPN to keep going." Matthews predicted that Calpine will have difficulty returning the $313 million out of the proceeds which it has already spent on gas purchases, "and that could push the company closer to the edge" of insolvency.

The research note also said that taken in tandem with an August court ruling in Canada - in which a Nova Scotia judge directed that Calpine set aside sufficient funds from its sale earlier this year of its Saltend Energy Centre in Britain to guarantee repayment of certain bonds bought before Sept. 1, 2004 - Tuesday's ruling by Delaware court vice chancellor Leo Strine "makes creditors more likely to seek every advantage in their dealings with CPN, and new money less likely to lend."

Matthews said that CreditSights was reiterating its long-held underweight on Calpine's senior unsecured notes, and was cautioning their would-be buyers that "since bankruptcy is more likely now [Wednesday] than it was [Tuesday, before Strine's ruling], maturity and coupon are not a consideration for unsecured debt if there is a filing."

The advisory service said that investors looking at Calpine would be better off in its secured debt, notably its CalGen second- and third-lien bonds. It also cautioned that while other classes of Calpine secured debt has value, "we advise being certain of asset coverage before buying."

Calpine secured debt up

Calpine's secured debt, in fact, rose a point or two on Tuesday in the wake of the ruling, traders said, apparently on the assumption by the holders of those bonds that a bankruptcy filing and reorganization which would leave them in a commanding position might not be too far off.

On Wednesday, those senior secured notes held steady at those higher levels, with the 9 5/8% notes due 2014 at 103 bid, 103.5 offered, its 8½% notes due 2010 at 72.25 bid, 74.25 offered and its 9 7/8% notes at 72.5 bid, 74.5 offered.

Calpine's New York Stock Exchange-traded shares - which had fallen more than 20% Tuesday in the wake of the ruling - were again on the slide Wednesday, dropping another 21 cents (15.11%) to end at $1.18, on volume of 67.6 million, more than five times the norm.

Six Flags heads down on vote dispute

Elsewhere, Six Flags bonds were riding a downward roller coaster Wednesday, losing ground after rebellious shareholders led by 11.8% owner Daniel Snyder apparently staged a successful palace coup against the underperforming Oklahoma City-based amusement park company's incumbent management, ousting CEO Burke, chief financial officer James F. Dannhauser and another management-allied director from Six Flags' board, where they would be replaced by Snyder as chairman, former ESPN executive Mark Shapiro as CEO and a third Snyder-allied director.

But while Snyder, the owner of the Washington Redskins football team, claimed in a press release that his Red Zone LLC investment vehicle had gotten the support of 57% of the shareholders in his effort to sack Burke and his team, doing the rhetorical equivalent of spiking the ball in the end-zone, Six Flags - which had opposed the Snyder effort on the grounds that it would interfere with the company's efforts to sell itself to the highest bidder - refused to concede defeat, pending an audit of the vote. Snyder, in turn, went to court in Delaware to seek a ruling declaring the vote result valid. Six Flags continued the battle of dueling press releases by declaring that the court suit was unnecessary and without basis, and promising it would take the appropriate legal action to defend its position.

The confusion over who is running the company, and whether the apparently incoming Snyder faction will be able to turn the company's fortunes around in a way that Burke could not, pushed the 9 5/8% notes due 2014 down to 98.25 bid, 99, and its 9¾% notes due 2013 down to 98.625 bid, 99.375 offered, each down a point on the day, a trader said.

Visteon lower on restatement

Also on the downside was Visteon Corp., in the wake of the Van Buren Township, Mich.-based automotive parts producer's announcement late Tuesday that it had re-stated its earnings from 2002 through 2004, as it had said in October that it would do following the discovery of accounting problems. Visteon also said it would delay filing its quarterly results for the first three quarters of this year.

Its 7% notes due 2014 slipped to 78 bid, 80 offered, while its 8¼% notes due 2010, while its 8¼% notes due 2010 retreated to 86 bid, 87 offered, both down a point to 11/2, a trader said.

Level 3 holds at higher level

Not everyone was skidding lower, however. Traders saw Level 3 Communications Inc. holding onto to the gains which the Broomfield, Colo.-based fiber-optic telecommunications network operator's bonds had notched during the early part of the week, when its benchmark 9 1/8% notes due 2008 moved up to 90 bid, 91 offered, a gain of about 1½ points over the two sessions.

Looking at a slightly longer time frame, one trader saw "buyers still around" for those bonds, which he estimated were "up about eight points since their numbers about two week ago," when the company filed its previously announced third-quarter results with the Securities and Exchange Commission, "and up 10 points ever since the WilTel news," noting the company's Oct. 31 announcement that it would acquire most of the assets of Tulsa, Okla.-based competitor WilTel Communications group LLC from Leucadia National Corp. in a cash-and-stock deal carrying a total price tag of about $680 million - just $370 million of that in cash. Level 3 structured the deal so it could get WilTel's valuable network assets, expected to immediately add to its cash-flow generation capacity, but without having to take on such white elephants as WilTel's Tulsa headquarters building or its equally undesired outstanding debt or mortgage obligations.

Another trader who saw the bonds in that same 90ish area called their rise over the past few weeks "incredible," adding that it's almost "scary - they're getting to where they could probably do a new deal" on favorable terms.

"I think people just think that their management is so savvy and their [large equity] investors are so deep that they may be able to pull some rabbits out of the hat."

With so many of its former peers in the fiber-optic and internet access businesses having fallen by the wayside in the massive shakeout that pared down the once formidable upstart telecom sector, and with Level 3 having weathered that storm under the leadership of chairman James Q. Crowe, having attracted capital from the likes of, at one point, Warren Buffett, and having emerged as the hungry, T Rex-like consolidator feasting on the remnants of other telecom companies further down the food chain to build its network, "I've got to hand it to them," he said - "they're survivors."

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