Calpine bonds languish at lower levels on suit news; Delta rise ends

By Paul Deckelman

New York, May 6 - Calpine Corp.'s bonds were seen wallowing around at lower levels Friday on the latest new bit of trouble for the San Jose, Calif.-based power generating company - the news that Calpine is on the receiving end of a lawsuit filed in Nova Scotia, seeking to force the company to devote any proceeds from the pending sale of its Saltend plant to fulfilling its obligations toward the holders of two series of bonds issued by Calpine's Canadian financing unit.

Elsewhere, the rise seen in the bonds of Delta Air Lines Inc. over the past several sessions seems to have come to an end, with the Atlanta-based air carrier's notes seen actually having lost altitude.

Dealings in the bank debt of distressed companies was meantime seen at a virtual standstill Friday.

Calpine was served with a lawsuit filed in the Supreme Court in Halifax, N.S., by Harbert Distressed Master Fund Ltd. - the same company whose letter last month warning that Calpine's sale of the British plant could leave the company unable to fulfill its obligations to the holders of Calpine Canada Energy Finance II's 8 7/8% notes due in 2011 and of 8 3/8% notes due in 2008 sparked a serious meltdown in Calpine's bonds and shares and a decline in its bank paper as well. Harbert is a large holder of both series of notes.

A trader said that most of the company's bonds were in retreat Friday on that news, as "everything traded off, except their short bonds," the 8¼% notes due 2005. He saw those bonds at 93.5 bid, 94.5 offered, around where they had already been trading.

On the other hand, he said, the company's other bonds "definitely came in" on news of the lawsuit, with the 10½% notes due 2006 at 79 bid, 81 offered, down from prior levels at 83 bid, 85 offered, while the company's 8½% notes due 2011 retreated to 53.25 bid, 55.25 offered from Thursday levels as good as 57 bid, 59 offered.

"Though '05," he said in explaining why the 2005 bonds were not part of the rout, "people believe the company has liquidity - kinda." He did note the fact that a bond slated to come due in such a relatively short time is still trading at a five-point point discount to par, which says something about the market's skepticism.

But while the first trader said that the lawsuit inspired angst had been the primary driver in an otherwise quiet session Friday, another trader was not so sure. He said the Calpine bonds "had all their action [Thursday], when the 81/2s fell seven points." He said that they remained at those levels, in the lower 50s, unchanged on the session Friday.

The Harbert lawsuit repeats the assertions the hedge fund made in its April 14 letter - that Calpine, which is now assessing bids it has gotten in an auction for the plant, might choose to use the proceeds from the Saltend sale for purposes other than backing the two bond issues, and it asks the court to order Calpine to keep those proceeds at the Canadian financing subsidiary and use them only for redemption of the bonds. A hearing has been scheduled for the end of August.

Calpine's vice president for public affairs, William Highlander, declined comment on the suit Friday, other than reading a prepared statement in which Calpine acknowledges having been served with the suit, says it is evaluating the Harbert claims, and vows to "aggressively" defend its actions.

Delta declines

Elsewhere, a trader saw Delta's 7.70% notes due 2005 retreat to about 82 bid, 84 offered Friday, from 84 on Thursday. Those bonds had been firming into the mid 80s over the previous several sessions from the upper 70s on market speculation - as yet not validated - that Delta will seek to take out those bonds before their looming maturity in a debt-for-debt exchange.

"Why they should consider that good news and take the bonds up puzzles me," said one market source, explaining that if the exchange materializes then the bondholders will get no cash for their maturing bonds, but only replacement paper - maybe even issued at a discount - that will not mature for at least a few years down the line. In the interim, some analysts and traders believe that Delta's financial future, at least in the near-term, is shaky, at best.

Delta's other debt, which would not be included in the debt exchange, should it occur, has not risen along with the 7.70s; Delta's 8.30% notes due 2029 have recently been mired in the mid-to-upper 20s.

Watching automakers

A trader in distressed bonds said that his shop was watching the newly junked General Motors Acceptance Corp. bonds, which were dropped to a BB+ level Thursday from BBB- previously by Standard & Poor's, along with all of the debt at the parent company.

The GMACS, which retreated several points Thursday on the downgrade, "are still heading downward," he said. "Right now, the sellers are tied up, at least for awhile until Moody's [Investors Service] and Fitch [Ratings] pull their plug - then they'll all puke them up, the high-grade guys." Moody's and Fitch still technically rate the world's largest automaker's bonds as investment-grade instruments, even though they are trading like junk bonds.

"Then, the bonds will go into junk hands, and for a while, there's not enough junk hands out there to catch them," meaning the prices will continue to erode.

"There were sellers all over today [Friday], with the bonds down a point or two on the shorter end, as they start to compress. People are selling the higher dollar prices."

For instance, he saw the GMAC 6 1/8% notes due 2007 dip to 96 bid from 99, while its 8% notes due 2031 lost five points on the day to 74.

© 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.