Calpine, airlines lower; Moog, Remy deals price, Six Flags plans add-on

By Paul Deckelman and Paul A. Harris

New York, Jan. 5 - Calpine Corp. bonds were being quoted about a point or two lower across the board Wednesday although there seemed to be no fresh news out on the San Jose, Calif.-based power generating company. Meanwhile, there was definitely news out that led airline-sector bonds lower, as Delta Air Lines Inc. announced a program of lower fares that some observers said could spark a destructive price war among the already problem-plagued carriers.

Although one sell-side source told Prospect News late Thursday that the secondary market felt a little weaker during the session, the primary market appeared to move from strength to strength.

In the new deal arena, Moog Inc. and Remy Cointreau SA were heard by high-yield syndicate sources to have successfully brought upsized, quickly shopped bond offerings to market. Six Flags Inc. announced plans to a new add-on offering to its existing 9 5/8% senior notes due 2014 - which immediately sent the existing tranche of bonds on a roller coaster-like plunge.

A busy January

Early Wednesday an emerging markets source told Prospect News that the inflationary warning embedded in the minutes released Tuesday afternoon from the Federal Reserve's Federal Open Market Committee's Dec. 14 meeting had caused an immediate and dramatic negative impact in emerging markets bonds.

However this source's color came with the admonishment that the minutes really contained nothing unexpected: the markets had already been anticipating that the Fed will continue to tighten.

Over in the high-yield market, sell-side sources said that while a negative sentiment seemed to take hold Tuesday and prevail through Wednesday, it was not near as dramatic as that felt in emerging markets.

"It was a little weaker today," one investment banker said, allowing that the FOMC minutes could conceivably have been the catalyst for negative sentiment regarding junk.

However, sources added, the primary market is continuing to operate purposefully.

"I think we could see $2 billion to $3 billion a week, once things really start to get moving," one investment banker said on Wednesday.

"People are still getting good executions. And orders are continuing to pour in for bonds.

"But there is concern out there about inflation, which we believe will ultimately have a negative impact on high yield.

"However we're not looking for that impact to be felt much before the end of February."

Another sell-side source, speaking well after Wednesday's close, simply said that there is plenty of evidence that January will be a busy month in the primary market.

Moog, Remy Cointreau upsize

Two quick-to-market issues priced during Wednesday's session. Both came upsized.

East Aurora, N.Y.-based Moog Inc., which designs and manufactures precision control components and systems used in military and commercial aircraft, priced an upsized $150 million issue of senior subordinated notes due Jan. 15, 2015 (Ba3/B+) at par to yield 6¼%.

That print was on the tight end of the 6¼% to 6 3/8% talk. The offering was increased from $120 million.

Banc of America Securities ran the books for the debt refinancing deal.

Meanwhile Remy Cointreau priced an upsized €200 million of senior notes due Jan. 15, 2012 (Ba2/BB-) at par to yield 5.2%, inside of the 5 3/8% area talk. The deal was increased from €150 million.

Banc of America Securities was joined on the Remy deal by BNP Paribas as joint bookrunner for the debt refinancing transaction.

Drive-by action for Thursday

Meanwhile the mid-week session saw two companies unveil quick-to-market deals that are expected to price by Thursday's close.

Price talk of six-month Euribor plus 900 to 925 basis points emerged Wednesday on Cognis Holding GmbH & Co. KG's €500 million offering of 10-year senior floating-rate PIK notes (B-).

The Goldman Sachs & Co. and Deutsche Bank Securities-led deal is expected to price Thursday in London.

The Düsseldorf, Germany-based specialty chemical company will use the proceeds to fund a dividend payment.

And Six Flags, Inc. will drive through the market Thursday with a $195 million add-on to its 9 5/8% senior notes due June 1, 2014 (assumed ratings Caa1/CCC).

Lehman Brothers has the books for the debt refinancing deal.

The Oklahoma City-based theme park company originally sold $325 million of the 9 5/8% notes due 2014 on Dec. 2, 2003 in an issue that was upsized from $300 million, and was priced at par.

And one for the road

Meanwhile news of a single roadshow start emerged on Wednesday.

Di Giorgio Corp. plans to start a roadshow on Wednesday, Jan. 12, for its $150 million offering of eight-year non-call-four senior notes (B2/B), which is expected to price on Friday, Jan. 21.

Merrill Lynch & Co. and Deutsche Bank Securities will be joint bookrunners for the debt refinancing and dividend funding deal from the Carteret, N.J.-based independent food distributor.

And Ripon, Wis.-based Alliance Laundry Systems LLC was reported to be bringing $150 million of eight-year senior subordinated notes (B3/CCC+) in an acquisition-related deal expected to come during the month of January via Lehman Brothers.

Alliance Laundry numbers among the relatively crowded field of companies that pulled income securities deals during the second half of 2004.

The laundromat company folded its offering of up to $375 million of Income Deposit Securities last Dec. 8.

Moog up in trading

When the new Moog 6¼% senior subordinated notes due 2015 were freed for secondary dealings, traders said the new bonds got as good as 101 bid, before going home at 100.75 bid, 101 offered, up from their par issue price earlier in the session.

The new Rite Aid Corp. 7½% senior secured second-lien notes due 2015, which had priced at par on Tuesday, were heard to have opened "a little weaker," a trader said, at 99.125 bid, 100.125 offered, before regaining most of that lost ground, to close at 99.75 bid, 100.75 offered.

Another trader saw the new bonds having come all the way back, observing that "a lot of paper - $40, $50 million - traded right at par, which was issue."

Six Flags lower on deal news

The announcement late in the day that Six Flags would bring the new $195 add-on issue to market "definitely put some pressure" on the existing 9 5/8% notes, the first trader said, quoting those bonds as having dropped to 98 bid, par offered, from 100.75 bid, 101.75 offered. He said the announcement did little for the New York-based theme park company's 9½% senior notes due 2009, which are to be taken out with the proceeds of the new deal, since those bonds have already been trading at 104.25 bid, 105.25 offered, around their scheduled call price, for quite a while.

Investors "knew they were going to take those out - people just didn't know exactly how they were going to take them out," he said. "So they're adding on five years, they're paying up 1/8 [%] in coupon, and probably a couple of points, just to do the deal, and they're going to take out the remaining piece of the 91/2s and grow the '14 tranche larger."

Calpine sinks

Back among the existing bonds that are not linked to any new-deal developments, Calpine's bonds were seen down, although there appeared to be no real negative news on the company.

"They were all down a bit," said one market source, who quoted Calpine's benchmark 8½% notes due 2011 down a point at 76, while the rest of the issues "were all down half a point or ¾ point," such as the 7¾% notes due 2009 at 75.5, the 7 7/8% notes due 2008 at 80.25, and the 8.4% notes due 2012 at 94 bid.

A trader saw the company's 8½% notes due 2008 having retreated to 78 bid, 80 bid, well off from 81 bid, 83 offered, previously, while another trader saw them "off a couple, with no breaking news." He said the market "was soft to begin with, and a week ago, they just rallied, and were up some points. Now they gave some of it back."

He quoted the 8½% notes due 2011 down 1½ points at 74.5 bid, 75.5 offered, and said that he had heard some talk that particular bond was off as much as three points, although he tended to doubt the retreat was that big.

And the bonds on the shorter end of the curve "hung in - it really didn't move too much," with the 8¼% notes coming due later this year at par bid, 100.75 offered, off "maybe a quarter-point."

Delta, other airlines lower

Another trader saw Delta's 7.70% notes due 2005 down a point at 91 bid, 93 offered, while its 7.90% notes due 2009 were at 63 bid, 65 offered, and the 8.30s were at 47 bid, 49 offered, both down two points on the day.

He saw weakness across the airline spectrum, with "Northwest [Airlines Corp.], Delta, all off," although he acknowledged that airlines in general and Delta especially had "really had a nice run" recently.

Northwest's 7 7/8% notes due 2008 were seen down about 4 points Wednesday to the 77bid, 79 offered mark, while Continental Airlines Corp.'s 8% notes due 2005 were a little less affected, off half a point, around 97.

The airline issues were getting clobbered pretty much across the board, following the announcement by Delta Air Lines that it is cutting its most expensive fares by as much as 50% nationwide and is eliminating other restrictions - a move seen as an effort to woo business travelers and other last-minute ticket buyers.

Atlanta-based Delta said that no fare would be higher than $499 one-way in coach class or $599 one-way in first class under its new program, and it said it was simplifying its fare structure, rolling out nationwide the "SimpliFare" procedures that it had been experimenting with since last summer on flights out of its Cincinnati hub.

There had been talk in the market that Delta would radically cut its fares, eliminate some burdensome rules - such as the Saturday night stayover rule despised by many travelers - and in general simplify its fare structure, in order to try and stem the inroads that low-cost carriers such as Southwest Airlines and JetBlue have made in recent years in markets served by Delta, the nation's third-largest airline, and other old-line "legacy" carriers like AMR Corp.'s American Airlines unit, UAL Corp.'s bankrupt United Air Lines, Northwest and Continental.

That scuttlebutt, while it was still unconfirmed, sent Delta's bonds up both Monday and Tuesday. But on Wednesday the first law of aeronautics was in play - what goes up, must come down. Or, perhaps, it was the first law of securities trading - buy on the rumor, sell on the actual news.

"Maybe [investors] just got to thinking" that this might not be such a boon for Delta, said one trader, who saw the Delta 8.30% notes due 2029, recently as strong as 52.25, retreat to 48 bid, 49 offered. "Everyone lost their appetite for some reason."

He said that given the revenue implications such a big fare cut might have for Delta - not to mention for the broader airline industry, should the other carriers follow suit, with some estimates of industrywide revenue losses as high as $2 billion to $3 billion - "it's a little strange to see [bondholders] get excited about that in the first place," he added.

Those bondholders "were reacting more to Delta not being in any immediate danger of bankruptcy," theorized Calyon Securities airline analyst Ray Neidl. On the other hand, he said, equity holders of Delta and other carriers were "reacting to [the question of] can they make money with these new fares, and evidently the market right now is reacting in a slight state of panic."

In Wednesday's dealings, Delta's New York Stock Exchange traded shares, which were off as much as 13% at one point, fell 51 cents, or nearly 7%, to close at $6.80. Continental shares fell 99 cents (8.1%), to $11.21 on the NYSE, while American was off 96 cents (9.6%), to close at $9.05. Nasdaq-traded Northwest fell $1.04, (10.8%), to close at $8.60.

Neidl said that Delta's move "was expected - it shows that they are confident that the can get their cost structure down, because the reduced simple pricing doesn't work if they can't" bring their costs down. He said the "SimpliFares" program that Delta had been testing in Cincinnati since August "seems to have worked there and now they're trying to apply it across the system - and it's going to put a lot of pressure on every other legacy carrier out there to maybe take a look at their [own] model and see what they're going to do."

The new lower fares and simplified structure are by no means a guaranteed slam-dunk return to profitability for Delta, which had flirted with bankruptcy last year; Even with the new lower fares and simplified pricing structure, Neidl said, it still leaves Delta with "a much more complex system," compared with the fare structures at Southwest and the other discount fare carriers.

"They [Delta] operate hubs, they operate internationally, they have a broad domestic system - but they're trying to morph more into a low-cost carrier, by simplifying the model, simplifying the service and simplifying the fare structure - and most importantly, getting their cost structure down."

On several past occasions, one major airline or another has floated the idea of lower fares as a trial balloon - only to pull it back amid great industry disapproval when the other big carriers failed to follow suit, but Neidl believe that this time around, "I think [Delta] is operating independently, unlike American a decade ago, and they're going to stick with this as long as they think it's working."

The analyst said that as far as whether the other carriers would follow Delta's lead, it wouldn't be so much a case of jumping on a Delta-led bandwagon as "looking very closely at this pricing module to see how it fits in with their systems." AMR, for instance, he said, "is experimenting [along the same lines] in Miami, so they're looking at the situation, yes."

Despite the worries among investors that the Delta fare cuts, if followed by others in the industry, could sharply cut airline revenues, including Delta's own, Neidl concluded that "long-term, it's probably a necessary move for Delta."

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