Calpine short bonds climb; KB Homes prices add-on, Reynolds slates deal

By Paul Deckelman and Paul A. Harris

New York, June 21 - Calpine Corp.'s shorter duration bonds were seen having firmed smartly Tuesday, with investors seemingly confident about the San Jose, Calif.-based energy provider's chances of successfully carrying through its turnaround plan.

Overall the high-yield market firmed slightly during the Tuesday session, according to market sources.

One source said that activity was light and tended to be focused on cable, health care and automotive names.

The source went on to warn, however, that the news late Tuesday, that Dearborn, Mich.-based auto maker Ford Motor Co. has trimmed its profit guidance and will be shedding 5% of its salaried North American workforce by October will conceivably create some chop in the junk market on Wednesday.

In the primary sphere, KB Home Inc. became the latest well-known issuer to dart into the market with a quickly shopped deal and then to emerge with a fistful of new-deal dollars, as it sold an add-on issue of 10-year bonds.

Reynolds American meantime said it would sell $500 million of bonds in a two-part offering, and use the proceeds to fund a tender offer for some of its outstanding bonds, while price talk emerged on Ocean Rig Norway AS' planned eight-year bond offering, expected to price on Thursday.

Four Bs and beyond

Tuesday's primary market session produced a dearth of news. Most of what did surface focused on companies whose credit ratings were Ba3 or higher from Moody's Investors Service and BB- or higher from Standard & Poor's.

One junk issue priced as KB Home did a quick-to-market $150 million add-on to its 6¼% senior notes due June 15, 2015 (Ba1/BB+) at 100.661 to yield 6.159%.

Citigroup ran the books for the debt refinancing deal.

The Los Angeles-based homebuilder priced the original $300 million issue at 99.051 on May 25, 2005, to yield 6.379%, and hence shaved 22 basis points off the yield of the original notes.

The only other transaction of which some high-yield market participants took note was a split-rated $320 million issue from Kansas Gas & Electric Co.

The Wichita-based utility priced its amortizing secured facility bonds, series 2005, due March 29, 2021 (Baa3/BB-/BBB-) at par to yield 5.647%.

The deal came at a spread of 160 basis points, tight to the Treasuries plus 162.5 basis points price talk.

Credit Suisse First Boston ran the books.

R.J. Reynolds brings $500 million

The only new deal to appear Tuesday came from Winston-Salem, N.C.-based tobacco company R.J. Reynolds Tobacco Holdings, Inc.

The company held an investor call on Tuesday, attempting to persuade the accounts to cough up $500 million for its two-part junk offering (Ba2/BB+).

Citigroup and JP Morgan are joint bookrunners for the debt refinancing deal.

The company plans to sell senior secured notes with five-year and 10-year maturities - tranche sizes to be determined.

The deal is headed for a Wednesday or Thursday pricing.

Ocean Rig talk

Finally the Tuesday primary market did produce news on a one single-B credit.

Ocean Rig Norway AS talked its $150 million offering of eight-year senior secured second-lien notes (B3/B-) at 8½% to 8¾%, with pricing expected on Thursday.

Morgan Stanley is the bookrunner for the debt refinancing deal from the Oslo-based owner-operator of drilling rigs.

Outrageously low despite correction

One investor, speaking on background Tuesday, maintained that yields on junk bonds remain "outrageously low," in spite of the market correction that was set in train during the early spring in the wake of General Motors Corp.'s slide to junk - a correction that has been estimated to total between 180 and 200 basis points.

This buy-sider added that although the Federal Reserve has been tightening - and appears bent on continuing to tighten - short-term interest rates, there remains a great deal of cash to put to work in the high-yield asset class.

And, the source added, the phenomenal liquidity of the high-yield market appears to be under no threat of drying up anytime soon.

KB Home little moved in trading

When KB Home's new 6¼% notes due 2015 were freed for secondary dealings, a trader said the bonds had settled in at around 100.5 bid, 101.5 offered, versus their issue price earlier in the session of 100.661.

The trader also saw Goodyear Tire & Rubber Co.'s new 9% senior notes due 2015, which priced Monday at par, as having opened at par bid, 100.5 offered, then having traded down to 99.25 bid, 99.5 offered, before "bouncing back" to recover at least part of its lost ground and ending at 99.5 bid, par offered, down half a point on the session.

At the same time, Qwest Communications International Inc.'s 7½% notes due 2014 - sold as an add-on issue Monday and having priced at 92.5 - were seen having improved to 93.5 bid, 94.5 offered.

At another desk, a trader pegged the new Qwest add-on bonds as high as 94 bid, 94.75 offered, while seeing the Goodyear bonds at 99.375 bid, 99.575 offered.

Retail buyers active

Back among the established issues, the second trader said, "it felt like today was kind of 'retail day' - there were a lot of retail buyers [as opposed to institutional], and they were moving the market north in the face of a lot of bad headlines, such as oil being where it is, and this and that. I think the market is expensive - but there's retail buying out there."

He said that there had been "a lot of odd-lot trades on Trace on the offered side, then offered-side plus, and big dealers adjusting their markets on little round-lot volume.

"There's definitely a retail bid - and that's strange. I haven't seen that in a while."

He said that you would think that the conditions would be unlikely to produce any kind of major retail-account presence - "I thought [it's] summer, slow, the market is expensive, not a lot of value out there - but I'm wrong."

Calpine heads higher

One issue which he saw definitely catching a retail-fueled bid was Calpine. The investors, he said, "just can't get enough of it," particularly Calpine's shorter dated paper.

For instance, he saw the company's 10½% notes due 2006, which had gone home on Monday at 90.5 bid, 92.5 offered, starting out Tuesday's session at 92 bid, 93 offered, and then finishing the day at 94 bid, 95 offered.

However, he said that "most of the buying was in the shorter stuff," like the '06s; he saw the 8½% notes due 2008 up barely half a point at 70 bid, and said that the 8½% notes due 2011 were essentially unchanged at 68 bid, 69 offered, "with not a whole lot of action going on. But there was definitely a rally in the shorter paper."

Calpine, he said, had seen a number of recently positive headlines, mostly having to do with the company's efforts to improve its balance sheet and cut its bloated debt load down from around the $18 billion level. Recently, Calpine said that it anticipates being able to meet its goal of bringing that debt load down to $15 billion by the end of this year rather than the end of 2006, as previously planned, and it also announced the sale of its big Saltend plant in Britain and several other asset-sale transactions, with proceeds slated for debt retirement.

On Tuesday, Calpine said that its indirect subsidiary Metcalf Energy Center, LLC, has received funding for its $155 million offering of 51/2-year redeemable preferred shares and five-year, $100 million senior term loan, the latest in the series of financing-related announcements, showing that Calpine - about whom unfounded rumors of a possible impending bankruptcy had swirled earlier in the year - certainly enjoys all the access to the capital markets that it might want.

That renewed investor enthusiasm for the company, along with the confidence of capital market lenders that Calpine will be able to make good on its debt cutting and improve profitability, coincides with Tuesday's official start of summer - traditionally Calpine's strongest season. With a large number of its plants located in such hot-weather, air-conditioning-intensive areas such as its home base of California, in Texas and the southeastern United States, Calpine is well positioned to rake in the revenues should there be the expected hotter-than-usual summer in its most concentrated markets.

AMC, Loews steady to slightly higher

Elsewhere, the major business news development of the day was the merger agreement between AMC Entertainment Inc. and Loews Cineplex Entertainment Corp. to merge, and it had some limited impact on the bonds of the two theater companies; a trader said that both issues of Kansas City, Mo.-based AMC were unchanged on the day, its 8 5/8% senior notes due 2012 unchanged at 103.5 bid, 104.5 offered, and its 8% subordinated notes at 89.5 bid, 90.5. The trader also saw the zero-coupon/12% senior discount notes due 2014 issued by AMC's holding company entity, Marquee Holdings Inc. as having tightened a bit to 59 bid, 60 offered from 58 bid, 60 offered on Monday.

The trader saw Loews' 9% notes due 2014 as having gained about 1½ points to 96.5 bid, 97.5 offered, while noting that there had been some confusion in the market over whether those bonds will be subject to the change-of-control provisions in their indenture when the merger is completed.

Indeed, in their joint news release, the two companies said that while the merger "will not constitute a change of control for purposes of the outstanding senior notes of Marquee Holdings Inc. or the outstanding senior notes or senior subordinated notes of AMC Entertainment Inc., . . . it has not yet been determined whether the merger will require a change of control repurchase offer under Loews Cineplex Entertainment Corporation's outstanding 9% senior subordinated notes due 2014." However, the companies said that they "have secured commitments to refinance such notes to the extent that such an offer is required under the indenture governing such notes."

They also said that they plan to refinance their senior credit facilities in connection with the closing of the merger.

A market source at another desk said that the AMC 8 5/8% notes had recently been trading at 105, but were now around 103.5, "down a point-and-a-half in the past few days," while its 9½% notes due 2011 were half a point lower at 98. He saw that Marquee's discount notes had gone to 58.5 bid from 59.

"It seems the news was building up on Loews a little over the last few days," he opined. "The market knew that something was going on."

Hertz plunges

The biggest bond move of the day came in an issue that is not junk - but which may be soon - as Hertz Corp.'s Baa3/BBB- bonds took a tumble on the possibility that corporate parent Ford Motor Co., already on the ropes from sagging vehicle sales, might sell the leading car-rental agency to private-equity investors, who would likely finance the acquisition by loading up on new debt.

That sent Hertz's 6¼% notes due 2009 skidding to 93.5 bid from Monday's levels at 97.75, which itself was a drop from 101.375 last week.

A source saw Hertz's 6.9% notes due 2014 fall to 93.75 bid, 93.875 offered from 97.25 on Monday and 101.875 on Friday, which he called "a pretty significant drop - but on light volume.

"It was just weird seeing Hertz fall that much," he added.

Ford's benchmark 7.45% notes due 2031 were seen at 85.25 bid, up half a point from Monday's levels.

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