Calpine firms, but AES lower again; near-junkers WorldCom, Tyco better

By Paul Deckelman and Paul Harris

New York, Feb. 7 - Calpine Corp. bonds were on the rebound Thursday, but another independent power producer whose bonds got clobbered Wednesday, AES Corp., continued to struggle. Nominally investment-grade issuers Tyco Corp. and WorldCom Inc., whose debt has recently widened out to near-junk levels, were both quoted better.

In the primary market Williams Scottsman was heard readying a $100 million add-on deal for marketing to investors, beginning Monday, and initial information emerged on a $125 million offering from RFS Partnership, LP.

Calpine "was all over the place," said a trader who quoted its bonds "bouncing between 72 and 78." At another desk, its bonds were pegged up three points across the board to around 77 bid.

Those bonds had fallen to the 72-74 bid range on Wednesday, after the San Jose, Calif.-based independent power producer disclosed that the Securities and Exchange Commission has begun an informal inquiry as to whether the company improperly disclosed financial information to analysts before making it public.

Coming as it did in the wake of revelations about alleged irregularities in accounting and financial disclosure at such companies as Tyco Corp., Global Crossing and the company whose accounting issues got the financial markets jittery about such things in the first place, Enron Corp., the Calpine disclosure must have looked like more of the same to investors, who knocked its stock down 22.29% to a two-year low of $1.95 Wednesday in New York Stock Exchange trading. But with Calpine itself having denied any improprieties, and with equity analysts from a number of major brokerages, including Deutsche Banc Alex. Brown and Williams Capital reported to have defended the company and called Wednesday's plunge an overreaction, the shares, like the bonds, went back up on Thursday. Calpine closed at $8.14, up $1.34 (19.71%), on volume of 36.5 million shares, nearly triple the normal turnover.

But the same turnaround could not be seen in the debt of Arlington, Va.-based AES, like Calpine an independent power producer. While no concerns have surfaced about AES' accounting or disclosure situations, it has traded lower on both the stock and the bond sides over the last month or so, hurt by the same sagging industry dynamics as Calpine. And like Calpine, it has to some degree been tarred in the minds of investors with the same "guilt-by-association" brush as the failed Enron, which is also a power producer and energy trader.

AES Corp.'s troubles came to the fore this week when it posted fourth-quarter net earnings, including various charges and gains, of $44 million (8 cents a share), down 80% from $224 million (43 cents a share) a year ago.

That caused the company's bonds to dive around four to five points on Wednesday, and on Thursday, a trader said, the bonds were still down. He quoted its 9.5% issue in the mid-70s, "a lot weaker than it's been over the past week or two." Elsewhere, AES was "down big again," a market observer said, quoting its 9 3/8% notes due 2010, which had fallen four points on Wednesday to 79 bid, as having slid another four Thursday to 75, while its 10¼%paper, which was off five points Wednesday at 85, eroded to 81 by the end of Thursday's dealings. Its 8 7/8% notes due 2011 fell to about 70 bid from prior levels in the mid 70s.

During the afternoon - probably too late to help its bonds - some favorable news for AES investors hit the tape. The Bloomberg news service reported that Public Service Enterprise Group Inc. - owner of stakes in a number of South American power companies - said in an SEC filing that AES had canceled an agreement to buy stakes in five Argentine power businesses for $420 million, because economic and political turmoil in the troubled Latin American nation has made the investments too risky. Public Service said it is challenging AES's grounds for backing out of the agreement, which was signed on Aug. 24.

With Argentina's peso having fallen 51% this year and the country in default on its debt and facing economic uncertainty, AES has already indicated that its finances have been badly affected; in releasing its results this week, AES said that part of its slide in fourth-quarter net income was attributable to a $26 million charge it took to account for the devaluation of the peso.

The news didn't help AES' debt Thursday, but its shares - which on Wednesday had fallen 14.06%, or $1.62 on the NYSE, rebounded Thursday, closing up 38 cents (3.84%) at $10.28. Volume of 6.1 million shares was almost double the usual amount of shares traded.

Troubled telecommunications operator Williams Communications Group Inc.'s bonds were on the downside again Thursday, after having stabilized for several sessions in the mid-20s from a previous 10-point plunge. One market-watcher quoted its bellwether 10 7/8% notes down three points to the session at 24.

Telecoms "did soften a bit," a trader said, quoting Williams long-distance rival Level 3 Communications Inc.'s benchmark 9 1/8% notes due 2008 bid in the 36-37 area, off a bit from 39 bid earlier. Nextel Communications Inc.'s widely traded 9 3/8% notes due 2009 were "still bouncing around in between that 65-68 level, but they're hanging in there. Not too much is happening." Another trader agreed, characterizing the Number-Five U.S. wireless carrier's debt as "just up and down. There really wasn't much going on."

European telecom operator Carrier1 International SA's 13¼% notes due 2009 were being quoted down in the 10-13 range, mired at those lower levels after the Swiss-based company announced earlier in the week that it was terminating its previously announced offer to give the holders of the dollar- and Euro-denominated bonds cash plus equity in exchange for their notes. Prior to the announcement that it was scrubbing the debt buyback due to lack of funds, the bonds had been quoted around 22 bid.

Carrier1 had further bad news for investors Thursday, saying it suspended its U.S. voice traffic service after a number of key suppliers refused to continue to provide necessary services without payment in full for past invoices, or credit support for future voice services. The company warned that it expects this action to result in "a very substantial decline" in its total revenues.

High-grade telecom operator WorldCom Group - whose spreads over Treasuries have recently widened out to junk-bond-like levels on investor fears over its prospects in the perilous telecom industry - came roaring back to some semblance of respectability on Thursday, despite soft fourth-quarter numbers and a threat by Moody's Investors Service to downgrade its A3 senior unsecured bond rating.

The Clinton, Miss.-based data, internet and long-distance company's 10-year bonds, which had been quoted having widened out earlier in the week to bid levels above 400 basis points over Treasuries, tightened about 75 basis points, and were seen trading around 335 basis points off the comparable government paper.

Its shares - which had also been getting clobbered lately - rose 83 cents, or 12.41%, to $7.52. Volume of 126 million shares was nearly five times the normal handle.

WorldCom reported that its net profit for the quarter fell by nearly two-thirds to $258 million from $726 million a year ago, and cut its revenue forecasts, projecting that its strongest business segment, data, will only grow at a mid-single-digit percentage rate this year - versus earlier predictions of growth in the low double-digits. But those results and projections were apparently not as bad as some in the investment community had feared.

And while Moody's noted in putting WorldCom's ratings on review for a possible downgrade that the company's volume and pricing pressures "will result in lower revenue and EBITDA growth in 2002 as well as free cash flow at the lower end of its previous guidance" and cautioned that WorldCom "has little flexibility in its A3 rating to absorb any disappointments," the ratings agency also reassured investors that "the degree of downgrade, if any, following the review is likely to be limited to one notch."

Meantime, when it announced its results, WorldCom took pains to assure nervous equity and corporate bond marketeers that apart from operating leases incurred in the normal course of business, WorldCom "has no off-balance-sheet financings or special-purpose entities" - unlike, say, Enron, which was bought down by allegations that it had used off-balance-sheet transactions with secret partnerships, some linked to company insiders, to disguise the true state of its finances.

Chief executive officer Bernard Ebbers also moved to reassure the investment community about the stability of the company, flatly declaring on a conference call that despite all of the "unbelievable" rumors about WorldCom circulating in the market place over the last week, "to question WorldCom's viability is utter nonsense."

Ebbers declared that with $10 billion of available liquidity, as well as "a solid base of bill-paying customers, strong fundamentals, a solid balance sheet (and) manageable leverage . . . bankruptcy or a credit default is not a concern." Ebbers also made short shrift of market buzz that he might have to liquidate his position in WorldCom stock to meet margin calls, saying he had ample funds available to repay all obligations and saw "no foreseeable circumstances" under which he might have to sell his stock.

Meanwhile, Tyco Corp. - whose nominally investment-grade rated bonds have also recently been languishing at junk-type prices, even being now quoted in dollars instead of on a Treasury spread basis - was also seen stronger Thursday, although a trader said he hadn't seen a lot of activity in the credit. The Hamilton, Bermuda-based industrial conglomerate's A2/BBB bonds were seen in the 80s, after having risen Wednesday. Its shares rose $2.13 (8.22%) to $23.05 on the NYSE. On Thursday, Tyco said Thursday it would cutting 1,000 jobs at its TyCom undersea cable unit - a move the company indicated that it had planned for some time.

It also moved ahead on its efforts to sell other divisions, including its Tyco Finance unit. While United Parcel Service Inc. denied media reports that it had expressed any interest in buying the business - which is to be spun off if no buyer is found - Reuters reported that General Motors' Corp.'s financial arm, General Motors Acceptance Corp., is among the parties who have expressed an interest in the Tyco financial operation.

In the primary, Thursday saw two new deals announced, from RFS Partnership, LP, and Williams Scotsman, Inc. And official price talk came out on upcoming offerings from Hanger Orthopedic and Kamps AG.

With the first full week of February coming to a close, one sell-side official who spoke Thursday with Prospect News, identified "drivers" that could operate to bring new issuance to the market in the advancing year.

"Obviously the interest rate environment continues to be attractive," the official commented.

"If the economy starts to show more strength you could see a pickup in M&A activity and growth capital, which the high yield market has historically been a provider for.

"The funds obviously have some cash to put to work but they're being selective. And the bank pro rata market continues to be difficult, which I view as a positive."

As others on the sell side have advised Prospect News recently, this official said that refinancing would bring new issuance - particularly refinancing of non-call five junk bonds issued in 1997.

"I think that the 1997 paper that becomes callable this year could create some interesting opportunity, because if you look at where the 10 year Treasury rates were in '97 versus where they are now, depending what point of the year you're looking it was probably between 125-150 basis points higher than it is today. That could help spur some refinancing activity."

However, this official warned, all is not necessarily well with the class of '97 high yield paper.

"The 1997 senior discount deals that become cash-pay this year - the telecom issuers that did senior discount notes - are going to start needing cash payments," the official said. "That's going to put a whole lot more pressure on that sector."

During Thursday's session, RFS Partnership, LP announced a new deal for $125 million of 10-year senior notes. Market sources identified Credit Suisse First Boston as the bookrunner. However timing on the deal was not available as Prospect News went to press.

Also Thursday, Williams Scotsman announced a $100 million add-on to its 9 7/8% senior notes due June 1, 2007 via Deutsche Banc Alex. Brown. The roadshow starts Monday with pricing expected Thursday, according to a syndicate source.

Price talk was heard Thursday on Hanger Orthopedic Group $200 million seven year notes via joint bookrunners Lehman Brothers, J.P. Morgan and Salomon Smith Barney. The deal, expected to price Friday, is seen coming at a yield of 10 3/8%-10 5/8%.

And price talk of the 8½% area emerged on Kamps AG's €300 million offering via J.P. Morgan. That deal is set to price Wednesday.

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