Calpine slides on earnings; Toys R Us mandatory soars on stock upgrade; MGI up 0.25 point

By Ronda Fears

Nashville, Feb. 26 - The convertible market was still better bid Thursday, traders said, but flow was "nothing dramatic, yet steady." Toys R Us Inc.'s mandatory was very active, however, and shot up almost 2 points as the stock got upgraded with a ballooned new price target.

Calpine Corp., however, was "knocked down a notch or two" after reporting earnings that failed to impress investors, although the company said it plans to revive by June the $2.3 billion refinancing effort of its generating unit - which was cancelled earlier this week due to a buyer's strike.

Meanwhile, the primary market continued its one-a-day regimen.

Ivax Corp. launched a $350 million overnighter talked at 1.0% to 1.5%, up 25% and 30%. The company said proceeds might be used to redeem debt, and the Miami-based generic drugmaker's 4.5% convert due 2008 becomes callable May 29 at 102.57.

The new Ivax traded at 3 points over issue price in the gray market, according to a buyside trader. Then the price talk was revised, and the gray market quote dropped to trade at 2 points over.

Revised price talk could not be confirmed with the bookrunner of the deal, UBS Investment Bank, however.

Also at bat was Houston-based Veritas DGC Inc., an oil well servicing firm, with its $125 million floating-rating convertible talked to yield the three-month Libor minus 25 basis points to plus 25 basis points, up 43% to 47%.

MGI Pharma Inc. upsized its deal to $225 million in proceeds of discount cash-to-zero convertible notes and priced it at 74.762 for a yield to maturity of 2.25%, up 30%. Boosted from $200 million, it sold at the middle of yield talk of 2.0% to 2.5% and at the cheap end of premium guidance of 30% to 35%.

Merrill Lynch & Co., bookrunner on the MGI Pharma deal, sent it home Thursday at 75, or a gain of about 0.25 point from issue price. Before pricing, it was offered in the gray market at 0.125 point over issue price with no bid. MGI Pharma shares ended Thursday down 5 cents, or 0.1%, to $48.35.

Regarding the reported Amdocs Ltd. $500 million convertible deal in the works, a company spokesman said the buzz was baseless.

An Israel newspaper reported earlier this week that Amdocs, a Chesterfield, Mo.-based firm that provides billing software for telephone companies, plans to sell convertible bonds to roll over its 0% convertible due 2021, a $400 million issue, which is putable June 1 at par.

"There's strictly no basis for that story," Amdocs spokesman Jim Monohan told Prospect News on Thursday. "We don't have any plans."

Calpine disappoints again

On the heels of scrapping a $2.3 billion refinancing effort by its generating unit, Calpine Corp. on Thursday reported earnings results that disappointed investors.

To boot, a convertible trader said the bottom-line debt reduction figure for the independent power producer was "not very impressive, given their level of refinancing activity" last year.

Calpine's new 4.75% convertible due 2023, a $900 million issue with the proceeds earmarked to take out its 4% convertible due 2006, dropped about 2 points, the trader said, to 110.75 bid, 111.375 offered.

Calpine shares closed off 9 cents, or 1.62%, to $5.47.

The quarterly results missed the company's own forecast earlier this month by a penny.

But, Calpine said it expects to be able to accomplish the construction debt refinancing - $2.3 billion in junk bonds and bank loans - by June and is confident the unit's contracted revenue stream can cover the interest costs until then.

"The refinancing risk in my mind is minimal," Calpine chief financial officer Bob Kelly said in the company's conference call on earnings. He added that with a low debt-to-equity ratio of 40%, he saw no need to issue more equity to pay down the bank debt.

Kelly said Calpine should have roughly $1 billion in cash on hand at the end of 2004 but won't achieve free cash flow until 2005.

Calpine posted fourth quarter earnings of $119.6 million, or 29 cents per share, versus a net loss of $25.2 million, or 7 cents per share, a year earlier. But extraordinary items put the company into the black; excluding the one-time items, the company would have posted a net loss of 14 cents a share.

Quarterly results were boosted 38 cents a share from accounting changes, 10 cents from the sale of assets and 9 cents from debt repurchases, offset by 14 cents a share in losses from one-time charges.

Revenue for the quarter edged up to $1.92 billion from $1.87 billion.

Calpine said low margins for its power plants continued to affect operating earnings but, going forward, the company is bullish on electricity prices - mainly due to economic recovery - and, assuming an average market spark spread of $7 per megawatt-hour, the company forecast breakeven results, on a GAAP basis, for 2004. EBITDA is projected at $1.7 billion.

At the beginning of 2003, Calpine launched an aggressive liquidity enhancing and refinancing program, which resulted in some $8.6 billion of transactions that the company said reduced debt by $461 million at year-end.

Toys spikes on UBS upgrade

A UBS Investment Bank analyst upgraded Toys R Us Inc. stock to buy from neutral and raised the price target considerably, to $22 from $14, and a buyside convertible trader said it prompted a huge response in the mandatory as well.

The convertible trader said the optimism regarding Toys R Us seems to be centered on its Babies R Us franchise and speculation that a store profile restructuring is imminent.

"Toys reports earnings next week, and there could be some sort of major announcement along with the figures, so this [upgrade to the stock] was a shove for anyone who likes the story to get involved," the buyside trader said.

"If there isn't some sort of news, though, about closing stores or building out the Babies R Us franchise, then there will be a mass exodus. Without one or both of those caveats, I wouldn't want to own this name."

The Toys R Us 6.5% mandatory convertible due 2005 was quoted by a dealer up 1.83 points to 45.8 bid, 46 offered. On the New York Stock Exchange, the issue closed up 1.81 points to 46 with 231,000 units changing hands, versus the three-month running average volume of 152,505.

Toys R Us shares ended up 73 cents, or 4.89%, to $15.66.

The toy retailer is scheduled to report earnings results on Wednesday.

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