Calpine trades around fair value in gray market but gets much skepticism from potential investors

By Sara Rosenberg

New York, Nov. 6 - Calpine Corp.'s $600 million senior unsecured convertible notes due 2023 seemed to receive mixed reactions as the paper was quoted as trading basically around par, or fair market value, in the gray market, but was also rejected by many potential investors as too risky.

The new deal was quoted in the grey market at 99½ bid, par ¼ offered late in the session, "implying that the issue is essentially fairly valued or will come around fair value", a sell-side source told Prospect News.

However, according to a buy-side source: "For this credit, fair value is not enough for me. I saw it at 102 in the grey market this morning. Now, it's basically trading below par. [And], my guess would be that the market reception is lukewarm since it's trading below par.

"My credit guy already looked into it and we're walking away," the buy-side source continued. "Capex levels are too high. Cash flow is negative. Refinancing isn't going to get them out of the hole to the point where we're comfortable with them.

"For the risk, we're not being compensated enough. It should have a 6½% to 7½% handle on the coupon, not 4.5%. They're trying to take advantage of the convertible market. They're just doing this because they can get away with it."

"We're going to pass on it," a second buy-side source said. "I'm just not comfortable with the stock valuation."

One sellside analyst put the deal at 1.7% cheap using the middle of talk, 40% volatility and a 930 basis points spread over Treasuries.

Calpine's new convertibles, which are scheduled to price after the market close Thursday, are talked to yield 4.25% to 4.75% with an initial conversion premium of 38% to 42%, market sources said.

The stock closed at $4.71, down $0.40 or 7.83% on the day.

Deutsche Bank Securities is the bookrunner on the Rule 144A deal.

The convertibles are callable after six years at 100%, and there are puts in years six, 10 and 15 at 100%, sources said.

Market talk had the deal containing a $200 million greenshoe, however that was not confirmed by press time.

Proceeds will be used by the San Jose, Calif. power company to repay or repurchase its existing 4% convertible notes.

The emergence of Calpine into the convertible market may get some people hoping that a new trend may be starting.

"$600 million is bigger than any issue that came in October," the sell-side source said. "There could be some people kind of waiting around for one or two new deals of that kind of size to come by year-end. Calpine made people wonder if there are any other large deals in the pipeline."

October's biggest dollar-denominated offering was Eastman Kodak Co.'s deal, which reached $575 million after the $75 million greenshoe was exercised, according to Prospect News data.

Overall, although the day was an active one, no specific sector or tone seemed to dominate the market as many were seen as just reacting to the newest influx of earnings reports.

"It's a non-thematic day," a market professional said. "People are just buying some things and selling some things. I think a lot of it has to do with earnings reports. People are reacting to that. It's fairly active."

Guilford Pharmaceuticals Inc. traded on Thursday mainly in reaction to its earnings release, according to the market professional.

During the day the convertible was quoted around 116 bid, 117 offered, basically unchanged, as the stock, although dipping a little earlier in the day, managed to come back up. But it managed to close higher at 128.22 bid, 130.22 offered, up 5.51 points on the day, according to a trader. The stock closed at $6.53, up $0.28 or 4.48%.

For the third quarter the Baltimore pharmaceutical company reported a net loss of $13.3 million, or $0.46 per share, compared to a net loss of $14.6 million, or $0.49 per share for the same period in 2002. Total revenues were $5.4 million compared to $3.3 million in the third quarter of 2002.

At Sept. 30, the company had $132.9 million in cash, cash equivalents and marketable securities, up from $101.8 million at Dec. 31, 2002 primarily due to two financing transactions including a $69.4 million 5% convertible notes offering and an $18.8 million term loan agreement.

Also trading was Carnival Corp. and Tyco International Ltd., both in reaction to the pricing of bond offerings, according to the professional.

"Something like that, a pricing of a straight debt deal, will always give convert guys something to price off of," the professional explained.

On Thursday, Carnival priced $550 million of senior unsecured notes due 2007 with an interest rate of 3.75%.

The Miami cruise vacation and leisure travel company's 0% convertible traded around 63¾ versus a stock price of $34.5, while the 1.132% convertible traded around the 641/4, 64½ levels, the professional said. The 0% closed at 63.97 bid, 64.22 offered, up 0.25 on the day, according to a trader. The 1.132% closed at 65.06 bid, 65.56 offered, up 0.31 on the day. The stock closed at $34.83, up $0.47 or 1.37%.

Tyco priced $1 billion of 10-year notes on Thursday at a 165 basis points spread over Treasuries.

The Tyco A convertibles traded around 114 versus a $22 stock price, according to the professional, and closed at 113.41 bid, 113.91 offered, down 0.23 on the day, according to a trader. The stock closed at $22.08, down $0.12 or 0.54%.

Besides the bond offering, Tyco has been active recently for other reasons including the recent release of earnings numbers as well as the announced restructuring plans.

On Tuesday the Bermuda-based diversified manufacturing and service company reported fourth quarter numbers that included a loss of $0.15 per share, compared to a loss of $0.72 per share in the fourth quarter of 2002, revenues of $9.5 billion, compared to $9.4 billion for the fourth quarter of last year and cash from operating activities of $1.8 billion.

Tyco also announced that it initiated a divestiture and restructuring program as part of its strategy to sharpen the focus on its core businesses, simplify operations and improve its cost structure.

More specifically, under the program, the company will sell the Tyco Global Network, its undersea fiber optic telecommunications network, and will exit more than 50 other businesses. Furthermore, manufacturing, sales, distribution and other facilities will be consolidated, resulting in a workforce reduction of approximately 7,200 employees.

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