Market weighs Calpine ratings downgrade; Adelphia stabilizes; Ventas slates $400 million

By Paul Deckelman and Paul A. Harris

New York, April 2 - Moody's Investors Service slashed the debt ratings of Calpine Corp. late Monday, but traders said the downgrade came too late in the day to have much effect on the company's bonds this session, although the market was expected to respond to the downgrade Wednesday. Meantime, Adelphia Communications Corp.'s bonds appeared to stabilize after three consecutive sessions on the slide.

In the primary market, Ventas Realty was heard preparing to take a $400 million two-part offering on the road beginning Thursday, while Swift Energy and Plaint Corp. also joined the new-deal lineup.

Those three took the number of high-yield deals announced in the first two days of April to 10.

"How much more extensively can the forward calendar build?" Prospect News inquired of one sell-side official.

"That's the question everyone wants to know the answer to," this source replied.

"I think it's got a ways to go," the official added. "We've got a situation here where a fairly strong year is building. That's going to continue to attract funds into the high-yield market, as well as the equity market.

"I think people are still a little reluctant to commit big dollars to equities now. And the next best way to play the economic upside is in the high-yield market. That's part of the reason you're seeing these monster flows come in."

Noting the appearance of triple-C credits Pliant Corp., which announced Tuesday, and Panavision which launched Monday, another sell-side source commented that the market is currently open for credits that may not have had access to high yield financing in recent quarters.

"You have a lot of issuers jumping through the hoop, here," this sell-sider said. "The market is open right now but at some point things are going to become choppy.

"You had a real pile-up of issuers that didn't have access to the market for a while," this sell-side official continued. "People also have a fundamental view that rates are going to be continuing upward as we recover from the recession, and now's a good time to lock in a good piece of fixed capital. They're ready to go out there and blow their brains out."

One dynamic that sell-side sources have noted is that the average deal size thus far into the year is small in comparison to the same time frame in 2001.

A quick look at the forward calendar reveals no new issuance greater than $500 million and a preponderance of offerings smaller than $200 million: of the 14 deals now in the market, only four are larger than $300 million, while six are less than $200 million.

JohnsonDiversey has the highest amount currently in the market, with $500 million, followed by Tesoro Petroleum at $450 million, Ventas at $400 million although split into two tranches, and Crescent Real Estate with $375 million.

In the less-than-$200 million category are American Seafoods with $175 million, Swift Energy, Block Communications, Alltrista and Synagro, each in the market with $150 million offerings, and Pliant, which annouced $100 million on Tuesday.

Widening the frame of reference to include all of 2002's first quarter business, the biggest deals of the year include Owens Brockway's $1 billion, Charter with three tranches amounting to just under $900 million, and Xerox with $600 million, or approximately $570 million proceeds. The average size of the deals that priced during the first quarter, according to figures published in the Prospect News league tables on Monday, is $255 million.

Compare that with the telecom-heavy first quarter of 2001, in which the average deal size was $350 million, including offerings of $1 billion or more from Charter (in three tranches), Nextel, Stone Container, Calpine and CSC.

"The deal sizes, particularly with telecom out of the market this year, have gotten smaller than they've been in the past," one sell-side official acknowledged.

"The thought was that the buy-side preferred larger deals because of liquidity issues. But now we're seeing comparatively smaller deals coming into the market: $155 million for Icon, $150 million for Altrista, $115 million for Wolverine.

"The reason is clearly that you have more single-B paper coming to the market than you did last year and also because of the absence of telecom, which used to do jumbo, billion-dollar offerings.

"Now with telecom absent the basic industrials are showing up with smaller issue sizes - some of them really small, like Wolverine and Hockey.

"Those were often viewed as the bottom rung of what is doable."

Another official commented that if you subscribe to the theory that the US economy is in recovery, the liquidity factor, with regard to smaller deal size, becomes less important.

"Liquidity is really an issue - really a PROBLEM - when the market is going down," this official said.

"In the past people got burned with small deals that didn't trade. They couldn't mark their positions. They just took a bath on these things.

"It was very painful. They started saying that whereas a couple of years ago they would have taken the deal for $100 million or $150 million, now they wouldn't look at a deal under $200 million. So when you wanted to bring a $150 million deal there was real sentiment out there that it was going to cost you. There was a liquidity premium associated with that.

"Now it looks like that's a bit less of an issue. And I think part of that could just be the upswing in the market."

On Tuesday, Ventas Realty/Ventas Capital Corp. announced a new two-tranche deal for $400 million of senior notes (Ba3/BB-). Although tranche sizes remain to be determined, a syndicate official said that the Rule 144A bullets would come with seven- and 10-year maturities.

UBS Warburg and Merrill Lynch & Co. are joint bookrunners.

The Louisville, Ky.-based health care REIT looks to price the deal on April 12.

Chicago-land based plastic packaging maker Pliant Corp., formerly known as Huntsman Packaging, announced $100 million of new 13% senior subordinated notes due June 1, 2010 (Caa1/B-), mirroring the $220 million of 13% senior subordinated notes it brought on May 20, 2000.

A syndicate source told Prospect News that Pliant's deal is not an add-on because the original deal contains restrictions that prevent the company from doing one.

"It won't be the same CUSIP but everything else will be identical to the existing bond," the source said.

JP Morgan is the bookrunner. Deutsche Bank Securities Inc. is the co-manager.

Pliant is presently pulling the deal out of the bag for investors to look at and plans to price it Friday.

Also on Tuesday, Swift Energy Co. announced an offering for $150 million of senior subordinated notes due 2012, which starts roadshowing Wednesday. Credit Suisse First Boston is the bookrunner for the Houston E&P's new off-the-shelf deal, which is expected to price April 11 or 12.

Price talk of 9½%-9¾% was heard Tuesday on Tesoro Petroleum's $450 million of 10-year senior subordinated notes (B1/B+), via Lehman Brothers. The deal is scheduled to price Wednesday.

And official talk of 9 7/8%-10 1/8% was heard Tuesday on Fleming Companies, Inc.'s $260 million of 10-year senior subordinated notes (B2/B+), via Deutsche. That deal is also slated as Wednesday business.

Meanwhile, Moody's cut the ratings on Calpine's senior unsecured debt by three notches to B1 from Ba1 previously, citing Calpine's "high leverage, limited financial flexibility, substantial ongoing capital expenditure requirements to complete its reduced build out program, and concerns about the company's liquidity profile." The ratings service warned that the San Jose, Calif.-based independent power producer could face an additional downgrade if the company's ability to raise cash further weakens, or if its cash flow generation comes up short.

A trader said that "everyone was expecting a downgrade, but I didn't expect three notches. That's a pretty drastic move." With the downgrade having come as late in the session as it did, its impact on Calpine's bonds was limited. He quoted Calpine's 8½% notes due 2008 and 2011 at 80 bid/81 offered before the news, and didn't see them after the Moody's announcement.

"We will wait and see what will happen in the morning," he continued. "It's about 50-50 which way the bonds will go - do they go up because everyone was expecting this and waiting for this to happen, or do their prospects look that much worse and will they ahead down? I'll need to hear what the analysts are saying."

Apart from Calpine, there was not much going on in the way of fresh news, and not much happening in the trading pits. "Zip, zero, nada," was the way one trader assessed what was - or, more properly, what was not - going on Tuesday. He did see some movement in Conseco Inc.'s bonds, which he said "had a little run" for a second straight session. He saw the Carmel, Ind.-based insurance and financial services concern's 2002 paper having moved up to the 93 bid level after starting at 87; its 6.40% notes due 2003, which had opened around 75 bid, got as good as 82 before coming off that peak level to still finish up solidly at 81.5 bid/82.5 offered; its 8¾% notes of 2004 were up two points at 55, and its 9% notes due 2006 firmed to 49 bid/51 offered from prior levels of 46.

Conseco debt is "crazy paper," he said. "It can drop 10 or 15 points; then the guy (Conseco CEO Gary Wendt) writes one or two letters to the editor (i.e. Wendt's "turnround memos" to investors) and the paper turns around a little bit."

Conseco appeared to have benefitted from its release Monday evening of its long-awaited annual report - eagerly anticipated by the financial markets not so much for the actual results as for the clean bill of audit health it received in the form of an unqualified opinion from independent accountants PricewaterhouseCoopers LLC. Among others, the credit rating agencies were especially interested in the results of the audit; Moody's in particular had recently warned that it might downgrade Conseco's B2 bond rating by two notches or more if the company didn't doesn't receive an unqualified opinion.

Conseco also heartened its debtholders - notably those with bonds maturing later this year - with its statement that it has plans to generate enough cash to cover about $1 billion in debt payments this year.

Elsewhere, Adelphia Communications Corp. debt seemed to have finally braked its slide on Tuesday, after three straight sessions on the downside.

A market source quoted the Coudersport, Pa.-based cable television operator's 10 7/8% notes as having moved up to 91 bid from 89.75 on Monday, while its 10¼% notes due 2011 rose to 88 bid from 87.

Adelphia - whose bonds and stock began sliding last week when it stunned investors by disclosing $2.3 billion in off-the-books loans to partnerships controlled by its founders - "pretty much held in" during Tuesday's dealings, a trader said, as the 10¼% and 10 7/8% "finally found their range " in the 89.5-91.5 neighborhood, "after they really got hammered".

He opined that "at these levels, it looks like there are some buyers out there, but nothing to push the bonds back up to anywhere near where they had been," such as the 106 bid region at which the 10 7/8% notes had occupied before the surprising announcement about the off-balance sheet transactions, with the 101/4s just a few points behind.

Another trader, who acknowledged that he hadn't seen much activity in the credit, quoted Adelphia's 9 7/8% notes "now down in the mid-to-high 80s" from prior levels in the par region, with its 7 7/8%s in the mid-70s. "There was not much trading in it. You didn't see people trying to unload that stuff yet. They're holding on to see what Adelphia has to say."

The trader saw "a generally quiet day, like yesterday, with not a lot of activity." One name which he did see on the upside was Computer Associates International Inc., whose nominally investment-grade bonds got clobbered by the market earlier this year on - what else? - accounting worries in the wake of the Enron Corp. fiasco; those bonds are still quoted in dollar terms, like junk bonds.

The Islandia, N.Y.-based computer software company's debt "had a little life to it," its actively traded 2003 bonds pushing up to 96 bid from prior levels around 94.5 bid/96.5 offered. Its longer paper, due in 2005 and 2008 was "creeping up as well," although he wondered whether "it was just one buyer, trying to push the market up."

Looking toward the secondary aspects of the new deal arena, the trader saw Fleming Cos.' existing bonds hovering around their recent levels, with Fleming's 10 1/8% notes at 104.25 and its 10½% notes at 102 bid. "They're up a considerable way from the past month or two, but in the past couple of days, no change there."

A trader saw Boyd Gaming Corp.'s new 8¾% senior subordinated notes due 2012 holding in at 101 bid/102 offered, "not too bad a level." The bonds had priced a week ago at par. But the trader noted that the Las Vegas -based casino operator "is a name that always trades well, anyway."

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