Calpine bonds up on debt settlement; Muzak strong on merger idea; funds see $32.5 million inflow

By Paul Deckelman and Paul A. Harris

New York, April 19- Calpine Corp.'s bonds were seen having powered up on Thursday, pushed higher by the news that the bankrupt San Jose, Calif.-based electrical generation company had reached a settlement agreement with the holders of some $12 billion of defaulted bond debt.

Elsewhere, bonds of Muzak LLC were seen hanging on to most of the gains notched earlier in the week, when the Fort Mill., S.C.-based recorded music company's debt moved solidly upward on investor hopes that it will be able to make good on its plans to merge with competitor DMX Inc. - and then sell the newly combined company.

On the downside, Spansion Inc.'s bonds headed lower in response to the semiconductor manufacturer's wider first-quarter loss.

Market sources marked high yield flat on Thursday.

In the primary arena, activity was fairly restrained, with roadshow details emerging on upcoming bond offerings for two transportation companies - trucker Swift Transportation Inc. and bus operator Atlantic Express Transportation Group.

Junk funds see inflow

As activity was trailing off for the day, market participants familiar with the weekly high yield mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif., told Prospect News that in the week ended Wednesday, $32.5 million more came into those weekly-reporting funds than left them.

That was in contrast to the previous week, ended April 11, which saw some $83.8 million leak from those funds.

However, it was the third inflow in the past four weeks, as the fund-flow numbers seem to be trying to regain the momentum they showed at the beginning of the year, when an aggregate total of some $862 million had come into the funds in the first two months, according to a Prospect News analysis of the AMG figures. That stretch run was then interrupted by a choppy four-week period in March, characterized by alternating weeks of outflows and inflows, none larger than $25 million. Over the past four weeks, though, inflows have been seen three times, for a net total infusion during that period of $193.2 million, according to the Prospect News analysis.

The latest inflow extends the year-to-date cash added to $1.018 billion among funds that report to AMG on a weekly basis, according to one source.

Meanwhile, funds that report on a monthly basis have seen positive year-to-date flows of $3.054 billion, the source added.

Hence, year-to-date aggregate flows, which tally both the weekly and monthly reporting funds, stood at $4.072 billion to Wednesday, according to the source.

It bears noting that one week ago a sell-side official said that that the four-week moving average of flows to funds that report to AMG on a weekly basis was positive $33 million, up to and including the week to April 11, which saw an $82.8 million outflow.

So the present week's $32.5 million inflow comes virtually on top of that four-week moving average.

The flow of money into and out of the junk bond funds is seen as a generally reliable market barometer of overall high yield market liquidity trends - although they only comprise 10% to 15% of the total monies floating around the high yield universe, far less than they used to - because there is no reporting mechanism to track the movements of other, larger sources of junk market cash, such as insurance companies, pension funds and, most recently, hedge funds.

Calpine climbs on debt settlement

Calpine's bonds were clearly the market's best performer on Thursday on news of the debt settlement, which would eliminate more than $8 billion owing.

A trader saw them "up two or three points," quoting the company's Calpine Canada Energy Partners II 8½% notes due 2008 at 123 bid, 123.75 offered, and the parent's 7¾% notes due 2015 at 123.5. He saw Calpine's 6% convertible notes also gaining, at 110 bid.

At another desk, Calpine's 8¾% notes due 2007 rose 3 points, to 121 bid.

Another trader saw Calpine's 8½% notes due 2011 and 8 5/8% notes due 2010 both at 122.75 bid, 123.75 offered, up from 119 bid, 120 offered on Wednesday, while yet another trader saw the 2011 81/2s at 123 bid, 124 offered, which he called up 4½ points.

In fact, those 81/2s were among the most actively traded bonds of the session, a source said, quoting them 3½ points higher at 122.75 bid.

The Calpine paper surged as the company announced a preliminary agreement with bondholders holding defaulted ULC1 bonds of its Canadian unit that, if approved, would eliminate more than $8 billion of claims, converting the $12 billion of multiple claims relating to the bonds to a single $3.5 billion claim.

That deal is subject to approval from the bankruptcy court in the United States and the equivalent courts in Canada, where the Calpine unit is the subject of an insolvency proceeding under the Companies' Creditors Adjustment Act, Canada's version of Chapter 11.

"This is an extremely creative resolution and I am grateful for the hard work of everyone involved in achieving this mutually beneficial outcome," Calpine's chief executive Robert May, said in a statement.

Some $2 billion of the defaulted ULC1 bonds were issued in 2001 by Calpine Canada Energy Finance ULC, an indirect wholly-owned Canadian subsidiary of Calpine, now in insolvency. These ULC1 bond obligations were guaranteed by parent Calpine.

With the more than $12 billion of claims scheduled to be replaced by the single nominal claim of about $3.5 billion, Calpine said, the bondholders have agreed that their actual recovery will be no greater than principal, accrued pre-petition and post-petition interest at the contract rate, plus fees.

A trader, who said the company's situation is "really an equity story now," noted it seemed likely that the bonds will be paid off, but the company will need to come through with an equity rights offering.

"What you are purchasing right now is really a right to partake in a future rights offering," he said of investors who are grabbing up the company's debt. "The total valuation I have heard is pretty high."

Amid speculation of a private equity buyout and/or an equity rights offering to bring the company out of bankruptcy, the common shares have been steadily climbing since the first of the year on hopes of some sort of distribution to the equity holders.

"I still feel there is upside in the price of the stock; there may be a time to sell but for me it's not now," commented one market source who is playing the equity.

"I think there is accumulation going on in the bonds and the stock by people looking for a juicy distribution. Yesterday and last week I would have disagreed, because the bonds were trading at par plus 18 months of accrued interest. For example, the 10½% bonds were trading for 116 while the 7 5/8% bonds were trading for 112. But today I see that many of the bonds, regardless of coupon, have shot up over 121."

Sweet music for Muzak holders

Elsewhere, Muzak LLC's 9 7/8% senior notes due 2009 and its Muzak Holdings LLC 13% subordinated notes due 2010 were seen hanging on to most of the gains they have notched this week in response to published reports indicating that the elevator and dentist's office music pioneer seeks top merger with rival DMX and then sell the combined company.

The 13s had the most appreciation. The normally little-traded bonds were seen by one market source having risen some 21 points on Wednesday to around 81.25, while another pegged those bonds up more than 26 points, though on very few trades, to close at 82.5.

The 9 7/8s, somewhat more actively trading, were seen having moved up from levels around 77 at the start of the year to around 80 by the end of March and then up to around the 88 level by the end of last week. They pushed up into the mid-90s at the start of the week and hit levels around 98, before falling back Thursday to end at 95.

Muzak and DMX, which also provide recorded background music to department stores, hotels, shopping malls and restaurants in addition to elevators, announced plans on April 12 to merge and then sell the company to an as yet unidentified entity. Standard & Poor's in response, put Muzak's CCC- rated notes on CreditWatch with positive implications, saying that if the deal goes through, the company may be able to refinance its debt and extend its maturities.

Homebuilder recovery continues

Also on the upside, a trader said, were names in the homebuilding sector, as that business - battered earlier in the year by sagging sales, compounded by the troubles of the subprime lending industry, tried to climb out of its hole.

He said the builders had been gradually gaining strength "for the past week, or week and a half."

He saw K. Hovnanian Enterprises Inc.'s 8 7/8% notes due 2017 up a point at par bid, 101 offered, while KB Home's 7¼% notes due 2018 were also a point better, at 94.5 bid, 95.5 offered. Standard Pacific Corp.'s 7% notes due 2015, after gaining a point on Wednesday, were up another ½ point on Thursday to 92.5 bid, 93.5 offered.

Tech names take a tumble

On the downside, tech names were getting hit, after posting losses. Advanced Micro Devices Inc.'s 7¾% notes due 2012 dropped more than a point to about 100.25.

That followed the Sunnyvale, Calif.-based computer chip maker's announcement that it had a greater-than-expected loss in the first quarter. AMD lost $611 million ($1.11 per share) in the first three months of the year - a sharp deterioration from its year-ago profit of $185 million (38 cents per share).

AMD reported $1.23 billion in sales, a 7% drop from the $1.33 billion it rang up a year ago.

The quarterly loss far exceeded Wall Street's consensus expectations of about 48 cents per share on $1.26 billion of revenues.

Out of that same high-tech sector, Spansion Inc.'s 11¼% notes due 2016 fell 2 points to 102.25, after that company, a maker of NOR flash memory data storage devices, saw its operating loss nearly double to $70.4 million, and recorded a net loss of $75 million (56 cents per share).

Two EM deals price

No issues were priced in the primary market, however terms emerged on a pair of junk-rated, dollar-denominated emerging markets deals.

Brazilian media firm Globo Comunicacao e Participacoes priced a $200 million issue of 15-year senior notes (Ba1/BB) at par to yield 7¼%.

The yield on the debt refinancing deal, via Deutsche Bank, came 12.5 basis points inside of the 7 3/8% to 7½% price talk.

And Dominican Republic electric utility Empresa Generadora de Electricidad Haina, SA priced an upsized $175 million issue of 10-year senior notes (/B/B-) at par to yield 9½%, also 12.5 basis points inside of price talk, which had been set at 9 5/8% to 9¾%.

Barclays Capital and Deutsche Bank were the joint bookrunners for the debt refinancing and general corporate purposes deal, which was upsized from $150 million.

The Friday session

Friday's action in the high yield primary includes a hybrid deal from Pfleiderer Finance BV, the holding company for German timber products-maker, Pfleiderer AG.

The company set price talk for its upsized €275 million offering of perpetual subordinated hybrid fixed-rate to floating-rate securities 2007 (B1//BB-) at the 7¼% area, according to an informed source.

The deal, via ABN Amro and Barclays Capital, was upsized from €250 million.

Elsewhere Hungarian Telephone and Cable Corp. lowered price talk on its €200 million offering of six-year floating-rate notes to three-month Euribor plus 300 basis points on Thursday afternoon, after having set talk at Euribor plus 325 basis points earlier in the session.

The Merrill Lynch & Co., BNP Paribas and Calyon Securities led deal, which is being run off of the high yield syndicate desk, is also expected to price on Friday.

Freight and passengers

Elsewhere during the Thursday session the forward calendar took aboard both freight and passengers.

Saint Acquisition Corp., which will merge with Swift Transportation Co., Inc., will start a roadshow on Monday for its $835 million two-part offering of second-priority senior secured notes.

The Phoenix-based freight company is offering eight-year floating-rate notes and 10-year fixed-rate notes.

Proceeds will be used to fund a portion of the acquisition of the company by Saint Corp., an entity created by Swift's founder and largest shareholder, Jerry Moyes, a current director and former chairman and chief executive officer.

Morgan Stanley is the left bookrunner. Wachovia Securities and JP Morgan are joint bookrunners.

And Atlantic Express Transportation Corp. began a roadshow for its $165 million offering of five-year senior secured floating-rate notes (Caa2/CCC+) via Jefferies & Co.

The Staten Island, N.Y., school bus company will use the proceeds to refinance debt and for general corporate purposes.

Both deals are expected to price during the April 30 week.

Stephanie N. Rotondo contributed to this report.

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