Power names gain despite FERC slam; Barney's sells 5-year unit deal

By Paul Deckelman and Paul A. Harris

New York, March 26- AES Corp. bonds and those of the power generating sector were up solidly for a second consecutive session Wednesday, even as federal energy regulators increased the size of the refunds that power operators must pay to the state of California.

Elsewhere, Lucent Technologies Inc. bonds were up, people said, on a potentially lucrative supply deal which the Murray Hill, N.J.-based telecommunications equipment operator inked with Sprint Corp. Other telecom sector names were also seen higher.

In the primary arena, Barney's Inc. sold slightly over $90 million proceeds of five year-notes and warrants.

AES continued to bask in the warm afterglow of Tuesday's announcement that the Arlington, Va.-based independent power producer had reached agreement on asset sales totaling $327 million, bringing to around $1 billion the amount of proceeds it has realized from such sales this year as it tries to reduce its more than $4 billion of debt.

A trader quoted AES' 9 3/8% notes due 2010 at 84 bid/85 offered, up three points from their ending level on Tuesday. At another desk, its 8 3/8% notes due 2007 were quoted up more than two points, at 68 bid. A trader saw an 81 bid, with no offer, on its 9 ½% notes due 2009.

However, the company's New York Stock Exchange-traded shares - which had jumped 12.2% on Tuesday in response to the asset-sale news - were down 11 cents (2.99%) on Wednesday to end at $3.57, on volume of 4.8 million shares slightly more than double the average turnover.

Indeed, the shares of virtually all of the merchant energy producers - even those with limited exposure to the problems in California - were down on Wednesday, after the Federal Energy Regulatory Commission ruled that the power generators would have to pay California $3.3 billion in refunds, arising from allegations that the electricity producers overcharged the state during the energy crunch in California and elsewhere in the west in late 2000 and early 2001. That was more than the $1.8 billion which an FERC administrative law judge had awarded the state back in December, but still well below the $8.9 billion in refunds the state was seeking. And since the state owes the producers $3 billion in unpaid bills, that cancels out most of the award, meaning California will only get about $300 million in refunds.

The FERC also put off a final decision on California's demand to set aside some $20 billion in long-term supply contracts signed at the height of the power crisis; the state had claimed that it was essentially coerced and manipulated into signing the contracts, which it termed excessive. Two FERC commissioners said they opposed California's request, and a similar request by utilities in neighboring Nevada.

The commission also announced several other enforcement actions against specific companies growing out the California energy crunch .

While the stocks of those electricity producers fell on the news, the bonds hung in, perhaps as investors realized that the total net amount which the companies will be forced to pay California - $300 million - is about one-thirtieth of what the state had been demanding. In other words, a very large bullet was dodged. They were also heartened by the FERC's refusal to immediately re-open the long-term contracts.

A trader said he had "not seen a lot doing in energy," and generally quoted most issues left bid without any offers, meaning that people want them but the people who have the bonds aren't willing to part with them, apparently in the belief that the bonds are likely to push higher.

He saw Calpine Corp.'s 8½% notes due 2011 up a point at 54.5 bid/55.5 offered, and quoted Dynegy Inc.'s 6 7/8% notes at 64.5 and its 8¾% notes due 2012 at 70, both bid without offers, "so go figure."

And he saw Mirant Corp.'s 9 1/8% bonds due 2013 at 47.5 bid/48.5 offered; its 8.30% notes due 2011 at 50 bid, and its 7 3/8% notes due 2006 at 60, bid without.

"It didn't seem like there were many panicked people there," he declared.

Another trader likewise saw Dynegy's 6 7/8s up a point at 65 bid/66 offered, and also saw the Calpine bonds up a point.

However, he said there was "nothing" doing with the bonds of El Paso Corp. - which had already settled with California, last week - and saw the debt of Williams Companies Inc. unchanged.

'"Maybe we'll see some life tomorrow [Thursday] as people digest the impact of the FERC news," he ventured.

He also expressed some surprise that "we didn't see much movement" in CMS Energy Corp. bonds, despite the Dearborn, Mich.-based energy producer's news Tuesday that its banks had extended the maturity on the $123 million remaining on its revolving credit facility from March 31 to the earlier of either June 30 or the date when it closes the sale of its CMS Panhandle Companies unit.

CMS' 6¾% notes due 2004 were at 94 bid/95 offered, while its 9 7/8% notes due 2007 were at 91.5 bid/93.5 offered, both little changed.

A market observer said that he hadn't seen much doing either in the energy sector, "except for NRG [Energy Inc.] and Xcel [Energy Inc.], which he saw "up anywhere from two to six points" after Minneapolis-based Xcel said Wednesday that its board had approved a tentative $752 million settlement with the creditors of NRG, Xcel's troubled power generation and trading unit. That settlement calls for Xcel to make payments totaling up to $752 million to NRG over the next 13 months for the benefit of NRG's creditors, in partial consideration for their waiver of any claims against Xcel.

Other than that, the observer said he had seen "no increased activity" Wednesday in power company-related debt, even with the FERC ruling, although he opined that " I expect to see some tomorrow," perhaps in Mirant, which was downgraded by Moody's Investors Service late in the afternoon - too late to have much impact on trading.

The ratings agency cut the Houston-based power producer's senior unsecured rating to Caa2 from B1 previously, while its senior implied rating was slashed three notches, to B3 from Ba3.

Moody's said the company's senior unsecured ratings "continue to be notched down from the senior implied rating due to the expectation that future renewals of existing bank debt will be done on a secured basis, effectively subordinating the senior unsecured bonds."

It said the ratings downgrade reflects a number of factors, including "continuing uncertainty related to the ultimate resolution of the company's significant debt obligations coming due over the next three years, including $3 billion of bank credit facilities, given the company's limited access to public debt markets, "as well as ongoing concerns about the level of cash flow that the restructured company will be able to generate, relative to its high financial leverage. Moody's further cited "the likelihood that minimal amounts of free cash flow will be available for further debt reduction resulting in continued reliance on asset sale proceeds. "

Outside of the power sector, a trader said "I don't know why, but telecom was better and energy unchanged."

He saw Lucent's 7¼% notes due 2006 having pushed up to 87 bid/88 offered. According to news reports, Lucent investors were encouraged by the news - announced on Monday - that Lucent will supply high-speed Internet access equipment to Sprint Corp.'s local telephone division. No price tag was put on the deal.

The trader also noted that Level 3 Communications Inc. "Looked strong as well," with its 9 1/8% notes due 2008 firming to 75 bid/76 offered from 73.5 bid/74.5 offered Tuesday. Time Warner Telecom's 9¾% notes due 2008 moved up to 75.5 bid/76.5 offered, a three point gain on the session.

There was little bond market reaction to the news that the World Trade Organization had ruled against steel tariffs imposed by the U.S. at the behest of several beleaguered North American steel manufacturers. A trader said that AK Steel Corp. - whose bonds had lost several points Tuesday in response to bearish guidance in its annual report - was about the only steel issue that routinely traded around anymore, with most of the rest of the sector either bankrupt, heading in that direction, or coming out of Chapter 11 without much debt. He quoted AK's 7¾% notes at 91 bid/92 offered, about where they had been Tuesday and down about two points from Monday's levels. At another desk, U.S. Steel's 10¾% notes due 2008 were down a point-and-a-half, at 97.25.

A trader said overall, the market "is bid again. People have continued to buy over the last couple of days," even with stocks gyrating around in response to the war news and the likelihood that the conflict may be longer and more difficult than first believed.

"There's tons of cash there" after recent liquidity inflows, "and even though a lot of bonds are trading at rich levels and people are loathe to buy that high, they still want to get in, or stay in."

He noted that, for instance, even though LIN Broadcasting lowered its guidance - which might normally trigger an exodus from the bonds - its 8% and 8 3/8% notes due 2008 remeained rock steady at 103.5 bid/104.5 offered.

Meanwhile in the primary, as headlines continued to stream out of the Middle East on Wednesday - some encouraging and some ominous - the high yield market heard terms on two junk bond deals, one of them from earlier in the month, leaving only two offerings remaining on the forward calendar.

That scarcity of supply, according to one investor, delineates the difficulty faced by portfolio managers presently attempting to navigate the cash-laden high-yield asset class.

On Wednesday Barney's Inc. priced an offering of units comprised of five-year senior secured notes and 2.5% warrants, which came at a significant discount, resulting in $90.1 million of gross proceeds for the company.

Terms also circulated the market Wednesday on a sale of $156 million of Noveon Holdings, Inc.'s PIK notes due Aug. 31, 2011, a transaction that took place on March 10.

According to high-yield market sources, Noveon's $156 million of PIK notes were sold by Goodrich Corp. on March 10. The unrated notes priced at par to yield 13%. The 13% PIK coupon steps up to 15% in 2006 if the company does not switch to cash interest at that point.

Goodrich received the notes in February 2001 as part payment for Noveon, then its Performance Materials segment. Purchasers were equity sponsors AEA Investors Inc., DLJ Merchant Banking Partners III, L.P. and DB Capital Partners.

JP Morgan was bookrunner on the March 10 Noveon deal, according to market sources.

Also pricing Wednesday was a deal from Barney's New York, Inc. subsidiary, Barney's Inc. It was comprised of 106,000 units made up of senior secured notes and warrants that priced at 85, resulting in $90.1 million of proceeds.

The 9% five-year senior secured notes (B3/B-) yielded 13.192%. The units also contain warrants to purchase 2.5% of Barney's New York, Inc. common stock.

Jefferies & Co. was the bookrunner.

With those transactions completed, market sources told Prospect News on Wednesday that only two deals remained on the road: Dan River Inc.'s $150 million of six-year senior notes (B3/B-) via Deutsche Bank Securities, scheduled to conclude its roadshow on Thursday, and the recently announced €1 billion of seven-year eurobonds in dollar and euro tranches from Vivendi Universal via the five-way bookrunning syndicate of Goldman Sachs, JP Morgan, Banc of America Securities, Royal Bank of Scotland and Salomon Smith Barney, which was scheduled to start roadshowing Wednesday.

"The market is very quiet," said one investor who spoke to Prospect News on background, Wednesday.

"There is very little new issuance and very little going on, period," the buy-side source continued. "You have money coming in, and no new issuance, so spreads have just gotten tighter and tighter on a supply-demand basis. And since there is no new supply, you either bid up the prices of the names you like or you lower the quality. That's one of the shortcomings of this market."

When Prospect News told the high-yield investor that sources on the sell-side have been saying that the U.S.-led military effort to oust Iraqi dictator Saddam Hussein may effectively be sidelining investors, this buy-side source retorted that with an abundance of cash that needs to be put to work, it is not a likely scenario.

"I don't think that has affected anybody's portfolio," the source said. "It's more a question of 'Did you get cash in or did you get redemptions?

"I can't imagine that anybody isn't investing because of what's going on in the Middle East."

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