Calpine bonds dive as heads roll in executive purge; talk emerges on TUI deal

By Paul Deckelman and Paul A. Harris

New York, Nov. 29 - Calpine Corp. bonds swooned badly Tuesday after the troubled San Jose, Calif.-based power generating company announced the ouster of the company's founder, Peter Cartwright, from his positions as chairman, chief executive officer and president, as well as the departure of Calpine's chief financial officer, Robert D. Kelly. Traders and analysts said the shakeup sets the stage for a likely restructuring, either in or out of court.

While Calpine's statement announcing the changes praised Cartwright as a pioneer in the merchant power generating industry, it declared that the company's board felt that the executive changes "are essential to better address Calpine's financial challenges and to provide a new direction for the company."

Calpine clearly dominated the proceedings in the secondary market, which in turn took center-stage back from primaryside players. About the only development in the new-deal arena was the price talk which emerged on TUI AG's planned €1 billion two-part offering of fixed- and floating-rate notes.

Calpine "was the one," a trader said, quoting the company's 8½% notes due 2011 and 8½% notes due 2008 each down about 10 points, at 25 bid, 26 offered and 27 bid, 28 offered, respectively.

"All of the [unsecured] stuff was pretty much trading on top of each other, but that's the ones we saw had a good portion of activity in."

The biggest fall of the day was in the unsecured 10½% notes due 2006, which in the words of another trader, "got completely crushed," collapsing down to 32 bid, 34 offered from Monday's levels about 30 points north of that. "They're almost all on top of each other, like they're going to file [Chapter 11]."

"Those got crushed, big-time," yet another trader said in reporting the 30-point fall in the 101/2s, and in the 7 5/8% notes due 2006, which he saw collapsing down to 31 bid, 33 offered from prior levels in the 65-70 area.

"They're all compressing down to between 28 and 33 on the bid side," he said - usually a sure sign that the market is expecting a bankruptcy reorganization soon.

Other issues which took a tumble, he said, were Calpine's 8½% notes due 2008, which fell as low as 26 bid, 28 offered from Monday's levels around 40 bid, 42 offered, before coming slightly off that low point to end at 28 bid, 30 offered, while its 7¾% notes due 2009 dropped as low as 26 bid, 28 offered before ending at 30 bid, 32 offered, still well down from Monday's 38 bid, 40 offered.

About the only survivors of the Calpine carnage were the company's secured notes, whose holders are expected to emerge from any reorganization pretty much whole while the unsecured debt holders and certainly the equity holders take a haircut. A trader saw the secured 9 7/8% notes due 2011 hanging in at 76 bid, 77 offered, the 8½% notes due 2010 in the mid-70s, and the company's 9 5/8% notes due 2014 "still trading at a premium," at 103 bid, 104 offered.

"All of that paper hung in there," he said, "but the unsecureds got absolutely mowed."

As did Calpine's New York Stock Exchange-traded shares, which meantime nosedived 71 cents (56.80%) to close at 54 cents per share, deep in penny stock territory, a fall severe enough to get Calpine booted from the S&P 500 equity index. Volume of 188 million shares was more than 13 times the norm.

Traders see Chapter 11

A bond trader surveying the wreckage declared: "The bottom line is: the Street is presuming that because you are getting rid of the two masterminds of the 'let's sell assets now to pay off our maturing debt' plan, now that they're gone, this could potentially be clearing the decks for a bankruptcy filing. It could have been the last straw."

"I think that people were just taking this news about getting rid of the founder and chairman as being the setup for a bankruptcy filing," another trader said. "The paper is certainly trading like it - and now the short paper, which has [heretofore] held up the best, is down the most, and the prices [of all of the unsecured bonds] are converging."

He said that the 10½% '06s "had held up more than the others on the hope that Calpine could keep making asset sales and muddle its way through '06 and then pay it off" - but its fall to around 30 from prior levels around 60 marks the end of that supposition.

Calpine's management purge comes at a time when the company is struggling to bring down a debt load estimated at $17 billion, and is still reeling from its latest setback - a Delaware court ruling last week that said Calpine had improperly used some of the proceeds from a recent asset sale to buy natural gas for its power plants, could not tap the remaining proceeds for that purpose and would have to restore the improperly used funds.

Cartwright was replaced as chairman and chief executive officer by Kenneth T. Derr, who served as chairman and CEO of energy giant Chevron Corp. for 11 years until his retirement in 1999. Derr assumes the CEO position on an interim basis, with the company promising to announce a new permanent CEO in the near future. Cartwright also relinquished his position as president of the company.

Kelly is being replaced as CFO on an interim basis by his deputy, Eric N. Pryor, who is also an executive vice president of the company.

Calpine lost $242 million in 2004 - and those losses have only increased this year, with $684 million of red ink over the first nine months of this year. The company was recently embarrassed when it reported its third-quarter results and held the usual conference call - only to later that same day withdraw its press release and remove the conference call replay from its website, roiling the stock and debt markets for hours until finally announcing, late in the evening, that the results had included some erroneous adjusted EBITDA calculations. In the grand scheme of things, the snafu did not really amount to very much - but it contributed to investor unease about management's competency.

The company's image was further dented last week when the Delaware Court of Chancery ruled that Calpine had improperly used $313 million of the proceeds from its $1.05 billion sale of its domestic natural gas assets to the newly organized Rosetta Resources Inc. to buy natural gas with which to run its plants. Ironically, recent price increases in the energy markets meant that Calpine was paying far more for that gas in September than it got for selling the equivalent amount of gas reserves to Rosetta in July. When bondholders objected to the use of the Rosetta proceeds for anything other than debt repayment and convinced The Bank Of New York, as their bonds' collateral trustee, to demand repayment and to freeze the remaining $400 million of Rosetta proceeds, Calpine went to court to gain access to the latter monies - but vice chancellor Leo Strine ruled that the $313 million had in fact been spent improperly, and directed Calpine to restore the funds to the escrow account, although he did not set a time frame for doing so.

Calpine's shares, bonds and bank debt fell in the wake of that ruling - with traders saying the price action reflected the markets' view that cash-strapped Calpine will have a difficult time selling other assets and meeting its goal of reducing its debt to $15 billion, which it has now delayed into next year, and won't be able to access the capital markets either.

"I don't see how they can do it," a bond trader said of Calpine's chances of avoiding a court-supervised restructuring. He mentioned the Delaware court ruling - both the prohibition against Calpine tapping any more of the Rosetta proceeds, as well as the requirement that it pay back the improperly spent funds - as well as the need for money with which to continue buying gas to fuel its plants. "If you add all of that together, they're going to run out of money really fast and they have nowhere to raise it."

The company's latest troubles have essentially closed off the capital markets to Calpine. "Even [if they tried] a senior secured deal, people would be leery of it," he continued. "They've been mortgaging everything they have, and they've been doing [new] converts every time they could turn around - but now they've got a 50-cent stock, so that's out. Unsecured paper certainly doesn't work, and it's the senior secured lenders who are suing them. So I don't see how they can get back to the capital markets."

The senior lenders, he said "are sitting there saying 'you're selling off assets, you're taking the money and using it buy natural gas, which you're losing money on, and to buy back unsecured debt at a discount to hopefully make the balance sheet better,' but that all flies in the face of what a senior secured lender is. The assets are going out the door, and they're not getting anything out of it."

A lot of people, he added "were at least hoping they could hold on for a long enough period of time to muddle through some of this." But with all kinds of negative factors combining into a sort of "perfect storm," including the recent spike in natural gas prices, Calpine - which "has been on the verge [of bankruptcy] for a long time" has managed up till now to "muddle through by selling assets, but I think that game is over for them."

He predicted a filing "pretty quickly - they don't have a lot of time here," and believes that Calpine, which has new chairman Derr also filling the CEO spot on an interim basis, will choose as its real CEO a restructuring/turnaround veteran to lead it into bankruptcy and then out again.

Merrill ups rating on second-lien notes

In a research note Tuesday, Merrill Lynch & Co. said that Calpine's "regime change" suggests "a much higher likelihood of restructuring" for the company. Should such a restructuring come, wrote Merrill fixed-income analyst David Silverstein, it would likely involve only the parent company, rather than any subsidiaries, and would result in interest savings of about $800 million per year for Calpine.

Silverstein said that Merrill was upgrading its standing recommendation of Calpine's second-lien notes to "overweight-100%" from "overweight-70%" previously, on the belief that "these bonds should receive recovery at par plus accrued in a potential restructuring."

However, the investment bank downgraded two classes of Calpine bonds, dropping its recommendation on its first-priority notes to "underweight-70%" from "overweight-70%", and lowering its recommendation on Calpine's senior unsecured notes to "underweight-30%" from "overweight-30%" previously.

Silverstein said that while recovery in a restructuring for the first-priority notes "should be strong, these bonds could go non-cash pay in the interim, which exposes them to modest downside from recent levels."

As for the senior unsecured notes, on the other hand, "the prospect of a restructuring presents a near-term negative." He did note, however, that "longer-term, we see strong recovery from current levels."

Merrill Lynch also likes the third lien bonds of Calpine's CalGen subsidiary, reiterating its "overweight-70%" recommendation

Merrill's equity analysts, meantime downgraded Calpine's shares to "sell" from "neutral" in response to the executive suite bloodletting.

The ousters of Cartwright and Kelly "are a strong indication that the board is considering a bankruptcy filing of the company, or at least a substantial restructuring of the debt outside bankruptcy," equity analyst Elizabeth Parrella said in a research note. "We believe that in either scenario there will be no residual equity value."

S&P sees restructuring more likely

Standard & Poor's lowered Calpine's ratings by multiple notches in response to the executive changes - and the heightened possibility of a restructuring - cutting the company's secured notes two notches to CCC from B- previously and lowering its unsecured bonds three pegs to CC from CCC. The ratings have a negative outlook, reflecting, S&P said the chance that the board "may have a greater willingness to consider a financial restructuring as an option, evidenced by the removal of the CEO and CFO." S&P analyst Jeffrey Wolinsky also cited the Delaware court ruling, which he said "could materially harm the company's weak liquidity condition," and which "heightens our concerns about Calpine's ability to sell or monetize assets so that management can execute on a deleveraging plan."

Moody's Investor's Service, which has the senior implied and corporate family ratings at B3 and the unsecured bonds at Caa3, with a negative outlook on all ratings, said it was putting Calpine's debt under review for a possible downgrade, citing its "very weak operating cash flow relative to the company's substantial debt load," the impact of the Delaware court ruling and higher-than-expected natural gas prices on Calpine's liquidity and its "continuing need to raise significant external funds to meet operating expenses and debt maturities."

There was no immediate response to the day's events from Fitch Ratings, which rates Calpine's secured bonds at B- and the unsecured bonds at CCC- , with a negative outlook on all ratings.

Lear higher

Apart from Calpine, little activity was seen, although one trader said "if you weren't Calpine, you were steady to up half a point."

A buy-side source marked the high yield market up one-quarter of a point with retailers leading the way.

Another source from the buy-side said that the market was up by "as much as a quarter of a point," and told Prospect News that right now people are focusing on Hertz.

The above-quoted trader saw Lear Corp.'s 8.11% notes due 2009 firm to 94 bid, 95 offered from prior levels at 93.25 bid, 94.5 offered on the news that the Southfield, Mich.-based automotive seat and interior components maker and its partners in a bidding group, WL Ross & Co. LLC and Franklin Mutual Advisors LLC, have agreed to buy the bulk of bankrupt interior components supplier Collins & Aikman Corp.'s European businesses for cash in excess of $100 million and the assumption of certain liabilities and commitments of Collins & Aikman. The operations being bought by the consortium, called International Auto Components Group, had sales last year of over $600 million.

Six Flags steady

Elsewhere, a trader saw Six Flags Inc.'s bonds "pretty much unchanged, maybe up or down ¼ point" at levels around 99 bid, 100 offered "across the board," apparently little changed by the news that Washington Redskins football team owner Daniel Snyder has emerged triumphant in his bitter, months-long battle to oust the underperforming Oklahoma City-based amusement park operator's top management from the company's board and replace them with three of his own directors, including himself.

An independent inspector confirmed that 12% owner Snyder's Red Zone LLC got the support of some 57% of the shareholders in ousting chairman/CEO Kieran E. Burke, CFO James Dannhauser and another director allied with them from the board. The shareholders also approved several Snyder-proposed changes in the company bylaws.

Hertz priced to travel?

Given a scarcity of primary market news on Tuesday one buy-side source told Prospect News that Hertz Corp. appears to be pricing the senior notes in its $2.80 billion two-part bond offering "to travel."

The $2.2 billion senior tranche of eight-year non-call-five notes (expected B1/confirmed B/confirmed BB-) are coming onto the market with unofficial guidance of 9½%, the source said.

Meanwhile the $600 million subordinated tranche has unofficial guidance of 11¼%.

"Nine-and-a-half percent for that senior piece is pretty cheap," the buy-sider commented. "But they do have to move $2.2 billion, so I think you can demand a little concession on the pricing.

"The market has been under a little bit of pressure, although it has felt better over the past couple of days," the buy-sider added.

"It does not feel as though there is a great excess of cash out there. But this deal will be a good benchmark issue to test whether or not there is."

The source added that the Hertz transaction, via joint bookrunners Deutsche Bank Securities, Lehman Brothers, JP Morgan, Goldman Sachs & Co. and Merrill Lynch & Co., is expected to price on Dec. 14.

Both the seniors and the subordinated notes are expected to be sold in dollar-denominated and euro-denominated tranches.

Proceeds will be used to help fund the approximately $15 billion LBO of the company by Clayton, Dubilier & Rice Inc., The Carlyle Group and Merrill Lynch Global Private Equity from Ford Motor Co.

TUI talks €1 billion

With the Hertz deal still almost two weeks off there is a sizable chunk of euro-denominated issuance much closer at hand from TUI AG.

On Tuesday the German-based tourism company issued price talk on its approximately €1 billion of high-yield securities in three tranches, which are expected to price late this week.

Talk on two tranches comprising approximately €700 million of senior notes (Ba2/BB) is as follows: the five-year floating-rate notes are talked at Euribor plus 160 to 170 basis points and the seven-year fixed-rate notes are talked at a spread to mid-swaps of 187.5 to 200 basis points.

Meanwhile TUI's proposed €300 million of cumulative perpetual preferred securities (B1/B+) are talked at the 8¾% area.

Citigroup, Deutsche Bank Securities, HVB and The Royal Bank of Scotland are leading the TUI transaction.

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