Calpine bank debt up, bonds off as CEO, CFO ousted; airline issues seen up

By Paul Deckelman and Sara Rosenberg

New York, Nov. 29 - Calpine Corp.'s bonds took a tumble Tuesday as investors reacted to the uncertainty about the company's future following the sudden exit from their management positions of company chairman, chief executive officer and president Peter Cartwright - Calpine's founder - and chief financial officer Robert D. Kelly. However, its bank debt firmed.

The ouster of the two executives was seen by many in the market as a sign that the troubled, debt-laden San Jose, Calif.-based power generation company will soon file for bankruptcy protection or otherwise restructure.

Elsewhere, traders saw airline company bonds flying a little higher, given a lift by continued recently lower oil prices, as well as by more positive sentiment toward the sector, which took its lumps earlier in the year as Delta Air Lines Inc. and Northwest Airlines Corp. were beaten down into bankruptcy.

A trader in distressed issues quoted Delta's bonds as having gotten as good as 21 bid in morning dealings, well up from Monday's finish at 19.5 bid, 20.5 offered. Later in the day, he said, the Atlanta-based Number-Three U.S. airline carrier's notes backed off slightly from that peak, but still ended up a point at 20.5 bid, 21.5 offered.

He saw Northwest's bonds also a point better, at 37 bid, 39 offered, while the bonds of bankrupt United Airlines' parent, UAL Corp., were half a point up at 16.5 bid, 17.5 offered.

"There was good activity in some of the airline paper," another trader said, "all of which continues to improve - Delta, Northwest, United."

While acknowledging that news coming out of the bankruptcy courts might be a factor - Delta for instance won the OK of a federal bankruptcy judge Tuesday to sell some of its aircraft and to reject a lease on office space it rents in its home base of Atlanta - the trader said that to him, it seemed more a case of "a more positive view" by the market, helped by a variety of factors.

Oil prices - a leading indicator of future jet fuel costs - remain well below their $70 per barrel late-summer peak levels, helped by a continuation of relatively mild weather in the U.S. northeast and market sentiment that domestic oil reserves are sufficient to meet increased winter demand; light, sweet crude for January delivery lost 86 cents a barrel Tuesday on the New York Mercantile Exchange to finish at $56.50.

He also noted that airline industry leader AMR Corp.'s shares closed above $17, not too far below their 52-week peak level of $17.99. And, he said, investors feel that "Delta and Northwest will be able to conclude their bankruptcy filings in a lot shorter time than UAL took - UAL set the table for all of the negotiations that have to take place, and they're both somewhat less complicated than UAL anyway." Elk Grove Village, Ill.-based UAL, parent of Number-Two U.S. carrier United, entered Chapter 11 in December 2002, and now expects to emerge from bankruptcy early next year. Delta and Eagan, Minn.-based Number-Four carrier Northwest both entered Chapter 11 - on the very same day, in fact - in September.

Add it all up, and "everything has a positive tone in the airline sector."

Collins & Aikman little moved

Apart from Calpine and from the airlines, "there wasn't a heck of a lot that did go on" in distressed bond trading he said. He saw not too much movement in Collins & Aikman Corp.'s debt despite the news that a consortium that includes financier Wilbur Ross' WL Ross & Co. LLC and Lear Corp. agreed to buy the bulk of Collins' European operations for a cash price in excess of $100 million, plus the assumption of certain liabilities.

He saw the bankrupt Troy, Mich.-based automotive interior components maker's 10¾% senior notes due 2011 around 43-44, maybe "up a little bit but not much," although here and there he did see "a few strange prints around 46," but the bulk of the trades at that 43-44 level.

At another desk, however, a trader said that the while he had "seen nothing [Monday] when the [Ross] news came out, there were better bids [Tuesday] that moved the bonds up to 45 bid, 46 offered from 43 bid, 45 offered on Monday.

Delphi higher

He also saw Delphi Corp.'s bonds a point better at 55 bid, 57 offered; a bankruptcy judge okayed the Troy, Mich.-based automotive electronics maker's move to enter into amended agreements with its critical suppliers as a means of ensuring a continued flow of parts and materials to Delphi, while keeping prices level. Delphi has said such arrangements are essential. The company meanwhile continues talks with its unions on cutting wages and benefits - an initiative the unions have not yet signed onto.

Calpine draws most attention

But despite the activity in airlines and auto names, clearly, the main focus of the day was on Calpine.

Calpine Corp.'s second-lien bank debt closed out the day stronger, according to one trader in that market, despite the significant executive management changes that sent some of the company's bonds lower.

The bank debt closed out Tuesday's session with levels of 75.5 bid, 76.5 offered, compared to the previous session's quotes of 74 bid, 76 offered, the trader said.

However, the bank debt did get as low as 74.25 at some point during the day before rebounding to higher levels, a second trader added.

Bond traders said that Calpine's unsecured notes were hammered down, and have begun to converge at levels on either side of the 30 mark - usually a sign that the market expects a bankruptcy soon, since all notes of a similar class, such as unsecureds would trade on top of one another in the event of a restructuring, coupon and maturity not withstanding.

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.

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.

Secured notes steady

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 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 expect restructuring

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.

On Tuesday morning, the power company said that chairman and CEO Cartwright and CFO Kelly were leaving the company.

Calpine's lead director Kenneth T. Derr has been named chairman of the board and acting chief executive officer and Eric N. Pryor, executive vice president and deputy chief financial officer, will serve as interim chief financial officer.

"The board believes that these management changes are essential to better address Calpine's financial challenges and to provide a new direction for the company," the news release added.

Calpine's bank debt and bonds had spent most of last week in a downward spiral after the Delaware Court of Chancery ruled that its use of approximately $313 million of proceeds from the sale of domestic gas assets to purchase gas storage inventory violated its second-lien notes indenture.

But this week so far has been a different story, at least in the bank loan market, with levels consecutively posting gains over the past two sessions.

Prior to last week's court ruling, the bank debt was being quoted around 77 bid, 79 offered.

S&P cuts ratings

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 Investors 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.

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