Tesoro plans $900 million deal, Little Traverse pulls; Calpine down, halted; funds see $132 million outflow

By Paul Deckelman

New York, Nov. 3 - The nascent November junk market revival hiccupped a little on Thursday on word that prospective issuer Little Traverse Bay Bands of Odawa Indians had postponed its planned offering - the latest of several such recent postponements by would-be borrowers. But what the forward calendar lost from Traverse Bay, it more than made up for, with Tesoro Corp.'s announcement that it plans to sell $900 million of notes in a two-tranche offering. And another energy-related company - pipeline operator SemGroup LP - upsized its planned offering by $100 million.

In the secondary market, participants were scratching their heads over the situation with Calpine Corp., which announced third-quarter numbers - and more importantly said it might have to push off completion of its planned $3 billion debt reduction campaign until next year. That caused the San Jose, Calif.-based power generating company's notes to retreat - but then trading dried up completely at mid-afternoon when activity in Calpine's stock was halted and the company reportedly removed the press release publicizing its quarterly results from its website.

Also in the secondary sphere, some of the Canadian-based forest products names firmed on the possibility that help for the troubled industry could be forthcoming from Ottawa

And as the session was wrapping up, market participants familiar with the weekly junk bond mutual fund flow numbers compiled by AMG Data Services of Arcata, Calif. told Prospect News that $132 million more left those funds in the week ended Wednesday than came into them.

It was the eighth straight weekly outflow, following the $90.5 million hemorrhage seen in the previous week, ended Oct. 26; in that time, outflows have totaled $2.756 billion, according to a Prospect News analysis of the AMG figures. Outflows have now been seen in nine weeks out of the last 10 and in 15 weeks out of the past 17. During that latter timeframe, net outflows have totaled about $3.629 billion - up from the previous week's $3.497 billion total, according to the Prospect News analysis.

For the year so far, outflows have now been seen in 35 weeks of the 44 since the start of the year, against only nine weekly inflows. Cumulative net outflows for the year total around $10.668 billion, according to the Prospect News analysis, up from $10.536 billion last week.

The latest series of outflows pretty much establishes that the junk funds have reverted to the trend seen earlier in the year, when outflows totaling about $6.776 billion were seen in 15 straight weeks from mid-February through late May, according to the analysis. After that, there was a short period in which no clear trend could be seen, with about a month of inflows and outflows showing up on alternating weeks - but since July money has been almost consistently flowing away from the funds.

While the mutual funds only comprise between 10% and 15 % of the total monies floating around the high yield universe, far less than they used to, they are still watched by market participants, since they are considered a generally reliable barometer of the overall liquidity trends - and 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 hedge funds.

The figures exclude distributions and count only those funds that report on a weekly basis.

The flow of money out of the funds - and by extension, out of the junk market altogether - would seem to indicate that the trend seen in October, when primary activity shriveled to about $3.1 billion of total new issuance, the lowest total since May's $2.5 billion, according to Prospect News' calculations, is likely to continue in November.

Calendar mostly grows

But so far this month, that does not seem to be the case, with the new-deal calendar continuing to fatten nicely like a Thanksgiving turkey - just three weeks to go, by the way. And that calendar augmentation continued on Thursday, with the announcement by San Antonio, Tex.-based energy refiner Tesoro that it will sell $900 million of seven- and 10-year senior notes, actual tranche sizes to be determined.

The company plans intends to use the proceeds from the offering, together with cash on hand, to repurchase its outstanding 9 5/8% senior subordinated notes due 2008, its 9 5/8% senior subordinated notes due 2012 and its 8% senior secured notes due 2008.

Tesoro was just one of a pair of new deals coming onto the calendar. Market sources say that Lehman Brothers will be leading a $350 million offering of seven-year notes on behalf of Tronox Corp., as part of the Oklahoma City-based chemical company's coming spin-off from Kerr McGee Corp. That bond deal, disclosed in a recent Securities and Exchange Commission filing, is part of a larger financing package that also includes $450 million in bank debt and an upcoming initial public offering, slated for some time this quarter. No details as to the likely timing of the bond deal were immediately available.

Little Traverse postpones

Those two deals more than offset the $195 million which leaves the calendar, at least for the moment, on word from primaryside sources that that the Little Traverse Bay Bands of Odawa Indians, a Michigan-based Native American tribe that operates the Victories Casino and the nearby Victories Hotel in the northern part of the state, near Lake Michigan, has chosen to postpone its planned offering of eight-year senior notes, due to market conditions.

The decision to postpone the Banc of America Securities-led offering came after a roadshow marketing campaign that had begun on Oct. 25. Pricing had been expected to take place on Wednesday or Thursday, with price talk having emerged earlier in the week anticipating a yield in the 10% area.

The tribe had been planning to use proceeds from the bond deal to fund costs associated with the new gaming facility, to refinance existing gaming business debt and to fund a reserve for four interest payments.

The postponed offering is the latest of several pulled deals seen in recent weeks, with would-be issuers bailing out amid an environment of rising interest rates, economic uncertainties and a general sluggishness lately in the junk bond new-issue sphere.

On Oct. 26, market sources heard that Roundy's Supermarkets Inc. had postponed a planned sale of $175 million eight-year notes via Goldman Sachs and Bear Stearns - even though that deal had already been downsized and restructured from its original configuration in response to buyer unenthusiasm.

That postponement followed by a day the news that the controlling shareholders of Cablevision Systems Inc., the Dolan family, had chosen to not go ahead with their previously announced plans to take the Bethpage, N.Y. cable system operator private, and had cancelled a massive Banc of America/Merrill Lynch-led $4.25 billion multi-tranche bond issue that was to have funded the buyout.

Earlier in the month, Comsys IT Partners Inc. postponed a $150 million issue of eight-year notes that was to have come to market via Wachovia and Merrill Lynch, and Fosun International Inc. likewise shelved a $500 million offering of seven-year senior notes via Morgan Stanley and Citigroup. School Specialty, Inc. with $350 million of eight-year senior notes was another victim after a planned leveraged buyout collapsed while K-Sea Transportation Partners LP abandoned a$150 million seven-year senior notes offering because of market conditions.

In September, Euramax International postponed a $315 million offering of eight-year senior subordinated notes that were to have come to market via Goldman and Credit Suisse First Boston.

SemGroup grows

However, the postponed Indian casino deal was the only negative blip of the session, which also saw Tulsa, Okla.-based oil and gas pipeline operator and products distributor SemGroup LP upsize its planned offering of 10-year senior notes to $350 million from the $250 million initially shopped around.

High yield syndicate sources also said that the deal is likely to yield somewhere between 8½% and 8¾% when it prices, which is expected Friday. The books on the deal are scheduled to close at midday, with pricing taking place after that.

The offering is being brought to market via a large underwriting syndicate led by book running manager B of A, and by joint lead managers BNP Paribas, Harris Nesbitt, JP Morgan and Scotia Capital, as well as several co-managers.

Proceeds of the offering will be used to repay a portion of the company's senior secured credit facility.

Calpine trading stops as stock halted

Back in the secondary arena, Calpine was an object of fascination late in the session, when trading in the company's shares was abruptly halted at 3:15 p.m. ET by the New York Stock Exchange and was not resumed. That, in turn, dried up trading in the company's bonds. Market rumors, particularly on internet bulletin boards, none of which were substantiated, ran the gamut from the bearish - a coming bankruptcy filing for the debt laden, money-losing company - to the bullish: a coming buyout of the company by larger, better-capitalized players.

Further compounding the mystery were news service reports that Calpine had pulled its press release on its third-quarter results and a related investor presentation that had been posted on its website that very morning, and that the recording of the morning's post-earnings conference call with Wall Street analysts was also unavailable.

Calpine had earlier reported that it had swung to a net loss for the third quarter of $216.7 million (45 cents per share) from a year-earlier profit of $141.1 million (32 cents), while its per-share loss from continuing operations nearly doubled to 17 cents from nine cents a year ago. While Calpine said it was making progress with its plans to divest non-core assets, having lined up some $2 billion of sales so far, and was progressing with its debt- and interest cost-reduction efforts, "the timing [of completion of those efforts] may be delayed into 2006."

That, a trader said, caused the company's 8½% notes due 2008 to fall to 53 bid from 55. Before those numbers came out, he said, the 81/2s had traded up a point from Wednesday's closing levels around 54 bid, 55 offered. He saw a similar pattern with the Calpine 7¾% notes due 2009 - an early move up to 46 bid, 48 offered from Wednesday's 44 bid, 46 offered, but then a pullback post-numbers to around the same levels seen Wednesday.

The Calpine bonds "traded up a little bit and ended up pretty much unchanged, up until the point they stopped trading the stock - which got people very nervous" on the company's failure to deliver a timely explanation, said another trader, who pegged the company's 8½% notes due 2008 at 55 bid, 56 offered, up about half a point from Wednesday's levels. He saw Calpine's 8½% notes due 2011 at 47.5 bid, 48.5 offered.

He scoffed at some of the more dire rumored scenarios making the rounds of the grapevine, doubting, for instance, that the company would go through all the trouble of issuing results and having a conference call, only to then throw in the towel and file.

"The whole thing should be interesting to talk about tomorrow [Friday]," he said.

It was not until hours later that Calpine released corrected third-quarter data. The company had apparently erred in its original release in the calculation of third-quarter and year-to-date 2005 EBITDA, as adjusted for non-cash and other charges. It corrected the quarterly figure to $379.6 million from $516.4 million, and corrected the nine-months figure to $880.4 million from $1.12 billion.

The adjustments do not have an impact on the company's reported loss per share, cash on hand or operating cash flow, Calpine said.

Canadian forest products up

The second trader meantime saw forest products companies with Canadian operations up on the session "on rumbling that the Canadian government may offer them some financial help."

He said that Abitibi Consolidated, Bowater and Domtar Industries were all up about two points intraday and up a point on the session, with Abitibi's 8 3/8% notes due 2015 at 94.5 bid, 95.5 offered, Bowater's 7.95% notes due 2011 at 97.25 bid, 98.25 offered, and Domtar's 5 3/8% notes due 2013 at 81.5 bid, 82.5 offered.

He pointed noted that Tembec Industries "was not a part of all of that," with the paper and lumber company's 8 5/8% notes due 2009 unchanged at 68.5 bid, 69.5 offered.

Packaging sector better

Non-Canadian-linked paper and packaging names which were better included Graphic Packaging International's 9½% notes due 2013, two points up at 91.5 bid, 92.5 offered, and Solo Cup's 8½% notes due 2014, a point up at 84 bid, 85 offered. Commercial printer Cenveo Corp.'s 7 7/8% notes due 2013 were up three points to 96 bid, 97 offered, on "good results."

Tenet keeps gaining

Elsewhere, Tenet Healthcare Corp. bonds continued to improve, traders said, bouncing back for yet another session after hitting lows earlier in the week in response to weak numbers.

"They've really rallied the last couple of days," a trader said, quoting the Dallas-based hospital operator's 9¼% notes due 2015 up around two points on the day at 97.75 bid, 98.75 offered - well up from the lows around 93.5 bid, 94 offered that those bonds fell to after the release of the numbers on Monday.

"People were sort of expecting a downgrade by Moody's [Investors Service], he said, and what they did was a precursor - they took the corporate family rating down from B2 to B3. They don't have any bank debt, so it doesn't really mean anything, and they held the senior notes' rating at B3, so the bonds are up two or three points on that."

After Tenet's conference call, on which company executives cited the impact of Hurricane Katrina, "people were giving them the benefit of the doubt that the hurricane hurt their results this quarter, and they had a couple of computer glitches, but they should rebound the next quarter," he said.

He said the market was giving Tenet "a one-quarter grace period" - but warned that "if things don't turn around" in the current fourth quarter, "they're really going to punish these bonds after the first of the year."

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