New Calpine issue boosts sister securities; airlines hold up; convertibles overall lower with bonds

By Rebecca Melvin

Princeton, N.J., June 20 - Calpine Corp.'s off-the-shelf convertibles deal on Monday took the market by surprise; and while the new issue helped boost two sister securities of the integrated power company, the new securities themselves saw very little action.

Airline convertibles held up despite dizzyingly high oil prices but many other names were under pressure as the market overall took on a decidedly weaker tone, traders said.

Calpine sold at par $650 million of 7.75% contingent convertibles with an initial conversion premium of 29.03%. But the large issue was placed with a limited number of investors and didn't see any trades until midday, when it moved up a point to 101, a syndicate source said.

"It's very tightly held," the source said. Amid a void of trading news, rumors circulated that as few as two funds bought the whole issue. But the syndicate source said buyers numbered greater than four or five.

The new 10-year convertible, structured as bullet with no calls or puts, saw "a few trades," the source said.

In airlines, convertibles held their own and JetBlue Airways Corp. edged up half a point despite a second consecutive day of record high oil prices on the New York Mercantile Exchange. Oil contracts were bid up amid fears that demand is outstripping supply capabilities.

The contract for light sweet crude for July delivery rose 90 cents to $59.37 a barrel.

In addition, U.S. 10-year Treasury notes were lower amid growing expectations that further interest-rate increases will be implemented by the Federal Reserve to control inflation.

"The convertibles market followed the bond market, and was slightly weaker," said a New York-based sellside trader.

Meanwhile Impax Laboratories Inc. said it has readied a revolving credit facility which may be used to refinance its 1.25% convertible bonds that holders could push into default due to late filing of financial reports. And Navigant International Inc. extended by a day its deadline for gaining consents for waivers from holders. Both Impax and now Navigant have until Tuesday to get consents.

Calpine gains with new issue

Calpine's 4.75% and 6% convertibles rose throughout the day after the San Jose, Calif.-based power company sold its 10-year notes via sole manager Goldman, Sachs & Co. Most of the new issue will be used to pay off Calpine's High Tides III preferreds and some of its 8.5% unsecured notes.

The issue was seen as good news for this debt-laden company.

"It's a very distressed situation," a New York-based sellside desk analyst said, citing the high coupon, low premium, and lack of a put date on the new deal.

Credit rating agencies have been leaning towards the same opinion. On May 9, Standard & Poor's lowered its corporate credit rating on Calpine to B- from B and maintained its negative outlook. In addition, the ratings on Calpine's debt and the ratings on the debt of its subsidiaries were also lowered by one notch, with a few exceptions.

On May 12, Moody's Investor Service lowered its senior implied issuer rating to B3 from B2 and maintained its negative outlook.

On May 25, following a strategic initiative announcement, Fitch Ratings placed the company's credit ratings on "rating watch evolving," which means that Fitch may lower, maintain, or raise its credit ratings of the debt securities in the near-term.

Some in the market surmised that buyers of the new issue must have had existing Calpine stock shorted against High Tide preferreds because of the tight supply of stock available to borrow.

"I was surprised there was no borrow facility in the terms," a Connecticut-based buysider said. "The borrow is so bad in the company. It's been trading cheaply not only because of the bad credit, but also because of the lack of borrow."

The buysider suggested that the company had purposefully kept borrow tight so that it could negotiate with holders of the High Tides III preferred issue.

Calpine's 4.75% convertibles due 2023 traded up to 71, compared to an early price of 68 bid, 69 offered. The 6% convertibles due 2014 were also up, traders said. But no activity was seen in the company's 4% convertible due 2006, or its 0% convertible due 2021. Calpine stock on the New York Stock Exchange closed up 40 cents, or 12.9%, to $3.50.

Airlines hold their ground

After a slide last week, most airline convertible issues held steady Monday, while JetBlue edged higher after news that the Forest Hills, N.Y.-based carrier will issue a credit card, which will earn points that can be redeemed for travel, in a co-branding agreement with American Express Co.

Jetblue's 3.75% convertible debentures due 2035 and its 3.5% convertible senior notes due 2033 traded half a point higher, while its shares gained 29 cents, or 1.35%, to 21.81.

Delta Air Lines Inc.'s 2.875% convertible due 2024 was seen flat, compared with its Friday close at 35.749 bid, 36.249 offered, a trader said. And Northwest Airlines Corp.'s 7.625% convertible due 2023 was unchanged from Friday's close at 46.258 bid, 46.758 offered.

Impax readies financing.

Traders said Impax Laboratories' convertible bond didn't respond to news that the Hayward, Calif.-based drug development company received commitments from Wachovia Bank, NA and Wachovia Capital Markets, LLC to increase the company's existing credit facility to up to $37 million.

The purpose of the increased facility is to refinance existing senior and convertible subordinated debt, and working capital, and to provide funds for general corporate purposes, the company said.

The financing "suggests that they're prepared for a corporate refinancing, but doesn't necessarily mean that they'll do it," said one New York-based sellside desk analyst, suggesting that such a move would prove costly for the company.

Impax didn't return phone calls regarding the $95 million of 1.25% convertibles in question.

The desk analyst suggested that the company could sweeten the deal for bondholders and avert default by boosting the value of the bonds by 5 points to 10 points. Changes in the package like moving a 2009 put date to be in line with a 2007 call date would be the type of revisions that would satisfy bondholders, he said. Impax has until Tuesday to garner consents from bondholders.

Englewood, Colo.-based Navigant International extended its solicitation of consents from bondholders until Tuesday. The consents would amendment an indenture for travel services company's 4.875% convertible subordinated debentures due 2023.

The consent solicitation will now expire on Tuesday at 5:00 p.m. The expiration date of the consent solicitation was originally June 17.

Saks buys back debt

Traders didn't see activity in the convertibles of Birmingham, Al.-based Saks Inc., after the retailer said Monday it will repurchase three issues of outstanding debt and offer consent solicitations for three others, including the convertible. Saks received a default notice last week from New York-based hedge fund, Highbridge Capital Management.

"It was very poor form. It turns my stomach," said one buyside analyst, regarding the hedge fund's action to serve default notice to Saks.

In the consent solicitation, Saks is seeking more time to file financial reports with the Securities and Exchange Commission.

If approved, it would keep the retailer from breaching covenants that could put it in default. In addition, it would rescind last week's notice of default relating to $230 million in convertible senior notes.

These companies are among at least 77 companies with market capitalizations of more than $100 million that have notified the SEC they would need more time to file quarterly reports, according to a report by Glass Lewis & Co., a San Francisco research firm.

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