Calpine bonds better; Tembec inches up; Movie Gallery slips; Hines Horticulture active

By Stephanie N. Rotondo

Portland, Ore., May 7 - Calpine Corp. and Tembec Inc. topped the list of active bonds Monday, with both issues firming from last week's levels.

A trader said the two companies, especially Tembec, were names that continued to spark interest with investors, thereby creating a good amount of activity in the bonds.

Meanwhile, Movie Gallery Inc. is continuing to slide after losing as much as 5 points last week, and one distressed trader is curious how the movie rental chain will accomplish an operational turnaround.

As investors and other market participants wait to see Hines Horticulture Inc.'s 2006 10-K, the bonds are starting to see more activity. The company announced Monday that an accounting error had been discovered in its financial statements, which sparked some movement in the bonds, a market player said.

Still, those in the distressed bond market are continuing to say that things have been quiet.

"I'm looking forward to 2008," one trader said. "This year is reminding me of 1998."

The trader said he is expecting things to pick up relatively soon, given the cyclical nature of the market.

"It will pick up without a doubt," he said. "Usually when people say it is going to be a slow summer, something happens to [get things moving]," he said.

Calpine bonds better

Calpine's bonds were deemed "better on more volume" by a distressed bond trader. He said the 8½% notes due 2011 were a point better on the day, at 199.5 bid, 120.5 offered, while the 4¾% convertible due 2023 - which the trader called a "hot issue" - came in at 109.5 bid, 110.5 offered.

"They took some gains off the table from their run [last week] and I guess they are moving back up," he said.

"There is a lot more quotes, a lot more trades getting done [in the name]," he added.

The trader also said that as Calpine stock has "found a base," interest in the convertibles has started. The stock closed up 5 cents, or 1.64 %, to $3.10.

However, the trader did not think that fresh news on the company was the cause of the gains. The San Jose, Calif.-based power company announced Friday that its subsidiary, Otay Mesa Energy Center LLC, obtained a $377 million credit facility to finance construction on a 596-megawatt energy center near San Diego. According to a press release, the finance facility is comprised of a construction loan that will convert to a term loan at commercial operations, expected May 2009, with the loan maturing in April 2019. The loan facilities, jointly arranged by ING Capital LLC and BayernLB, are non-recourse to Calpine.

Tembec inches up

Forest products company Tembec was a name that "continued to be quoted a lot," a trader said. He saw the 8½% notes due 2011 at 52.5 bid, 53.5 offered and the 8 5/8% notes due 2009 at 59 bid, 60 offered.

"I think it is a name folks are going to start taking a look at now that they've gone from the 80s back down to the 50s," the trader said.

He added that the bonds, which generally trade in relation to the strength of the Canadian dollar, have been a "nice trade."

"Guys rode it up from 50 to 80," he said. Now that it has hit 50 again, he believes market players will show more interest, as "we don't have a lot of $50 bonds."

Move Gallery slips

Last week saw Movie Gallery lose as much as 5 points on its 11% notes due 2012, and one trader believes the notes will "slowly drift downward."

He pegged the bonds at 84 bid, 85 offered, which he said was "off a tad from a couple of days ago." Another market source saw the notes at 84.25 bid, 85.25 offered.

The trader said that he sees the losses as relating to the "operational story."

"I just don't know how they are going to be able to pull [a turnaround] off," he said. "People were making their money and now, once again, it's an operational story."

Earlier this year, it looked like it was the end for the Dothan, Ala.-based movie rental chain. But a refinancing deal renewed many investors' interest.

Currently, however, "half the people aren't high on the business, others say the stock is worth $15," the trader said.

Hines Horticulture more active

A market source saw nursery supplier Hines Horticulture's 10¼% notes due 2011 close the trading day at 78 bid, 79.5 offered after trading as high as 81.

According to the source, the notes got active after the company announced that its financial statements for the fiscal years ended Dec. 31, 2004 and 2005 and the first three quarters of 2006 could not be relied upon due to an accounting error.

The company's audit committee and management said it had been determined that certain non-production costs had been incorrectly recorded, resulting in some costs previously included in inventory then expensed through cost of sales. The costs should have been written as incurred.

Hines, which has postponed releasing its financial results for the 2006 fiscal year due to the audits, said it also received default waivers from its lenders, as the company has yet to file its 10-K within the allotted time frame. The earnings release was delayed twice in March and has since received a letter from Nasdaq Global Markets that the company was in danger of being delisted.

"We have obtained a waiver from the lenders under our credit facility which waives the default of failing to deliver annual audited financial statements for the year ended December 31, 2006 within ninety days of the end of such year and certain other related defaults; provided that we deliver such audited statements to the lenders no later than May 28, 2007," Claudia Pieropan, chief financial officer, said in a press release.

Broad market mixed

A market source quoted Technical Olympic USA Inc.'s 9% notes due 2010 at 94.5 bid, 95.5 offered.

The source also saw 155 East Tropicana LLC's - also known as Hooters - bonds at 98.5 bid, 99.5 offered, which he called "sort of in line with Friday, probably a touch lower."

Though there was no real news out, Primus Telecommunications Group Inc.'s 8% notes due 2014 were "up a tiny bit" at 71.5 bid, 72.5 offered. "Somebody was poking around in those things," the source said.

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