Calpine bounces back; Xerox still weak; talk emerges on Entercom, Corus deals

By Paul Deckelman and Paul Harris

New York, Feb. 26 - Calpine Corp. debt was seen bouncing back on Tuesday, as the embattled power producer confirmed that it is near agreement with its lenders on a new secured credit facility which it said could "significantly improve" its cash position. Xerox bonds remained weak, amid legal difficulties for the copier giant.

On the primary front, two deals were announced, from Mail-Well Corp. and United Auto Group, Inc., with Steel Dynamics, Inc. unveiling a third with only limited information very late in the day. In addition, price talk emerged on two deals coming off their roadshow, headed for Wednesday pricings.

Entercom Communications Corp.'s $150 million offering of 12-year notes (Ba3/B+) was heard by the market to be talked at 7 5/8%-7 7/8%. Credit Suisse First Boston and Deutsche Banc Alex. Brown are joint bookrunners on the off-the-shelf deal.

Among those looking to play the offering is Evergreen High Yield Bond Fund portfolio manager Prescott Crocker

"The FTC just opened up ownership of radio and television assets, and allowed for television companies to buy radio assets," he commented. "It means the sky's pretty blue for valuation, in terms of takeovers.

"It is a consolidating industry. We're in a recovery phase. You'll begin to see better comps; earnings will comp well with advertisement improving. It's been a nice, cozy, warm sector in high yield. It's been an outperformer.

"Year-to-date total return in broadcasting is plus 3.14%. In radio it's plus 2.66%. In television it's plus 3.39%. A lot of that has to do with Young Broadcasting, on their sale of a Los Angeles television station. But even the radio is plus 2.6%. Radio's been a good place to be."

Also Tuesday, price talk of 9% area was heard on Corus Entertainment's $200 of million 10-year senior subordinated notes (B1/B+), via bookrunner Merrill Lynch & Co. and co-lead TD Securities.

"This is a high quality deal and everyone wants a piece," a syndicate source told Prospect News Tuesday. "It's an issuer with low leverage in a hot sector and the competing calendar is sparse, so I think it's going to be a blow-out. The 9% area price talk confirms that, in my mind."

Both Entercom and Corus are expected to price Wednesday, according to syndicate sources.

Detroit-based auto dealership franchisor United Auto Group paraded out its long rumored high yield deal Tuesday. It will bring $225 million of 10-year senior subordinated notes via joint bookrunners Bank of America Securities and J.P. Morgan. The roadshow starts Thursday.

And Englewood, Colo.-based commercial printer and envelope manufacturer Mail-Well Corp. announced an offering Tuesday of $300 million of new 10-year senior notes, via joint bookrunners Credit Suisse First Boston and UBS Warburg. The roadshow starts Thursday, with a March 8 pricing anticipated.

One sell side source who spoke Tuesday with Prospect News that although thin, the primary market forward calendar it seems to fit the present circumstances.

"People were a little surprised to see the forward calendar dry up to the extent that it did," the official said. "But I think the reality is that certainly compared to last year's issuance it is down, but when you look on an overall basis there has still been a sort of solid...call it a billion and a half...a week, on average.

"I think given the volatility in the equity market recently, and the fact that we've had a couple of weeks of outflows before last week's inflow, I think the market was just taking a little bit of a breather, and people were re-pricing, to some extent. And unless there is an acquisition or something guys don't have a compelling reason to go, right now. So they might as well just make sure that the market is right."

"I can see, based on the kind of inquiry we're getting, and what we're planning, that March could be a busier month than February has proven to be."

Meanwhile Prospect News heard more discussion of possible participation in the high yield by hedge funds.

When asked if the hedge funds could be increasing the volatility in the high yield, Evergreen's Crocker said: "Absolutely. There are a lot of situations where you can sell a stock against going long a bond. The stock market is obviously having a lot of problems. It's still in a down-trend. And you hedge yourself. You can get capital neutral by coming into the bond, which might be trading at, say, a 10% to 12% yield to worst.

"Or you could get into a telecom, or one of these wireless companies, and the bonds are trading at, say, 70 cents on the dollar and the stock is trading at $10: you short the stock and long the bond.

"The trend favors trades like that."

In the secondary Calpine's bonds "were up a bit on the day," a trader noted, quoting its 8 5/8% notes due 2010 and 8½% notes due 2011 at 70 bid/72 offered, up from prior levels around 67 bid/69 offered. At another desk, the senior bonds were seen having risen four points on the session to end at 71.

Calpine's rebound from Monday's lower levels was the next chapter in a strange series of events which had started Monday, when the San Jose, Calif.-based independent power producer's bonds had gyrated around at lower levels, quoted down as much as five points on the session before finally ending off around two points. The down-and-up activity was linked to Standard & Poor's first warning of a possible downgrade linked to a new secured credit facility that would subordinate the current debt, and then later withdrawing that warning, saying that no such deal had occurred. Despite the ratings agency's contention that the initial warning had been an error related to outdated information, some market participants couldn't help but wonder if, in fact, there actually was such a deal in the works, with S&P merely jumping the gun a little instead of being dead wrong about it.

That line of thinking appeared to have been vindicated when Calpine said on Monday night, well after the market close, that it has been examining "a wide range of options" aimed at giving it what it called "overkill liquidity" - presumably, enough of a cash cushion to withstand any possible contingency. Although it did not specify what form this might take, the company did say that among the options was "a new, expanded and secured credit facility that would significantly improve Calpine's cash position." It said immediately afterward that it "is currently finalizing its discussions with lenders." Calpine declined to give any further information about the pending financing.

The prospect of Calpine pushing its current bonds further down the totem pole in the capital structure with a big new layer of secured debt (some estimates Monday ranged as high as $2 billion) would appear to be a negative for its bonds; however, Calpine's apparent ability to complete such a financing at a time when the whole power generation and energy trading sector is suspect following the Enron Corp. fiasco and Calpine itself is wrestling with a Securities and Exchange Commission probe on disclosure issues would seem to be a vote of confidence by the lenders, and thus a positive. The market had, after all, reacted badly earlier in the month on both the equity and the debt sides, when Calpine indicated that it still had not closed on its new financing facility, which had been scheduled for completion last month.

Calpine shares were up 97 cents (14.20%) in New York Stock Exchange trading Tuesday, closing at $7.80. Volume of 21 million shares was somewhat higher than the recent 16-million share daily turnover.

Calpine's apparent coup of being able to secure financing in a difficult environment seemed to have a positive effect on other names in that same power-generation sphere who are affected by the same industry dynamics, including some investors' associating them with Enron's collapse. Calpine rival AES Corp., whose own debt has recently been whacked around on investor worries over the Arlington, Va.-based power producer's Latin American exposure and the feasibility of its plan to raise $1.5 billion via expected asset sales, was heard up about two points across the board Tuesday, with its 8% senior notes ending at 62. The company's subordinated paper, like its 8 3/8% notes due 2007, were also up a point or so, to the 43 bid area.

And a market source observed that "buyers were coming out" for investment-grade power generator Dynegy Inc.'s new 8¾% notes due 2012, which recently priced at par and which reportedly have elicited some interest from high yield players looking for a better quality credit in the industry. He saw the new bonds at 101 bid.

Outside of the power generators, Williams Communications Group Inc. debt and stock continued to erode Tuesday, after having tumbled Monday when the troubled telecommunications company said that a possible Chapter 11 filing was among the debt restructuring options it might consider. The Tulsa, Okla.-based long-haul telecommer - whose bonds had plummeted some eight points Monday - was down a bit further Tuesday, its 10 7/8% notes dipping to about the 12.5 bid level from prior levels around 14 bid, "down a bit but not much," a trader opined.

In announcing that it was looking at an expanded list of possible restructuring options, Williams said that it might consider a pre-negotiated Chapter 11 process as one possibility, and raised the prospect that a restructuring could result in substantial dilution of current shareholders' equity - reversing a position it had publicly taken as recently as Feb. 4 that no such steps were being contemplated.

Williams stockholders, understandably, were alarmed at the latest turn of events; after the shares fell 26 cents, or 56.86%, to 22 cents, in NYSE dealings Monday on a tenfold volume spike, the slide continued Tuesday, albeit at a reduced pace; Williams was down another three cents (13.64%), to 19 cents. Volume of 24.3 million shares was better than triple the usual level.

Elsewhere in the telecom sector, however, things were a little better. A market observer saw Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 up about half a point to 39 bid. The Broomfield, Colo.-based long-haul telecommer - a Williams rival - has been firm over the past several sessions, even as its competitor has weakened; Level 3 on Monday projected that its first-quarter results would likely meet or exceed its prior forecasts, and it announced the acquisition of Norwood, Mass.-based software distributor Corporate Software Inc. - a deal which will have the effect of keeping Level 3 in compliance with sales revenue covenants in its credit agreement through at least the second half od next year.

Also on the telecom front, Nextel Communications Inc.'s bonds "hung in there" at higher levels despite a general lack of trading activity, a trader said. He saw the Reston, Va.-based Number-Five U.S. wireless operator's benchmark 9 3/8% senior notes due 2009 trading most of the day at around 58 bid, up from Monday's level, and then saw a late day surge take the widely traded bonds as high as 59 bid.

American Tower Corp.'s 9 3/8% notes due 2009 - which had lost about three points in dealings Monday - were heard as high as 66.5 bid Tuesday, up nearly two points on the session, as the Boston-based communications antenna operator posted a somewhat wider-than-expected fourth quarter loss of $149.7 million (77 cents a share), versus $54.5 million (30 cents a share) a year earlier - but also cited better than expected revenues, which increased 20% at its leasing business. Cash flow meanwhile rose 26%, and the company it still expects to report free cash flow by mid-2003. On the downside, anticipating a difficult environment, the company cut the number of towers it expects to build to the 400 to 500 range, and cut its sales forecast to the $1.13 billion to $1.2 billion area.

However, shares jumped 57 cents (15.41%) to $4.27 on the NYSE, on normal volume of about 2.8 million; the market view seemed to be that investors had expected a wider loss before restructuring costs, and were relieved when it was less than they had feared.

Back on the downside, Xerox Corp. bonds were seen trading at lower levels after having recently been beaten up on no apparent news; on Tuesday, there was news, as Palm Inc. - the maker of the popular Palm Pilot handheld computer system - announced that it planned to "vigorously" appeal a recent court ruling that Palm had infringed upon Xerox's handwriting recognition software patent.

In the interim, Santa Clara, Calif.-based Palm claimed a small tactical victory, saying that the U.S. District Court in Rochester, N.Y., on Friday had rejected a Xerox motion to halt the sale of Palm Powered handhelds in the U.S. Palm also claimed that the court had called Xerox' effort to set a trial date to determine damages Xerox claims it is owed "premature" and had rejected that legal move.

For its part, Stamford, Conn.-based Xerox, meanwhile, said Monday that the judge had ordered Palm and its former corporate parent, 3Com Corp., to post a single $50 million bond.

A trader quoted Xerox's widely traded 5½% notes due 2003 as having opened offered at 90, with no bids seen. When bids emerged, he said, they were first at the 86 level, before tightening to 88 bid/90 offered by the close. Xerox's shorter-dated paper was "not much changed" at 99 bid/100.5 offered. Still, he noted, Xerox's debt was "off 10 points from what it was less than a week ago."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.