S&P: Calpine must pay down roughly $1.5 billion of debt to restore rating

By Ronda Fears

Nashville, Tenn., March 28 - In order for Calpine Corp. to merely restore its ratings with Standard & Poor's - not achieve investment-grade status - the independent power producer would need to pay down at least $1.5 billion of debt, whether by issuing equity or other means, S&P credit analyst Jeff Wolinsky said Thursday.

S&P analysts Wolinsky and Peter Rigby held a conference call to discuss the agency's downgrade of Calpine's corporate credit rating to BB and its senior unsecured debt to B+ from BB+.

"While the drive to be investment grade is there, it's not a pressing issue," Wolinsky said on the call, noting that Calpine has scaled back its capital expenditure budget to a point where the need for new capital is less.

The ultimate goal to a high-grade rating would be to provide more flexibility in accessing the capital markets, however, and the credit analyst acknowledged that it would be tough for Calpine to raise funding right now.

"We feel it will be difficult, if not impossible, for them to issue unsecured debt in the near future," Wolinsky said.

Should Calpine reduce its leverage by paying down debt, at least $1.5 billion, he said it would provide some flexibility and grounds for S&P to consider restoring its ratings.

"Right now, interest coverage is very low," Wolinsky said, noting that the downgrade was the result of Calpine pledging assets for its new $2 billion bank facility recently and the resultant further subordination of its unsecured debt that stands at about $8 billion.

The new secured bank facility will raise Calpine's long-term borrowing costs, S&P said, and put considerable pressure on its ability to repay $3.5 billion of debt coming due in the next two years. Also, the agency is concerned about California's efforts to lower the amount of money for power under long-term contracts signed last year during a statewide energy crisis.

The analyst acknowledged that Calpine is cash flow positive and some $12 billion to $13 billion of its estimated total assets of $20 billion are unencumbered, but debt service ratios are not expected to improve much until 2004.

With the new bank facility, S&P said Calpine's adjusted minimum interest coverage stands at about 1.9 times and the average funds from operations to interest coverage is at about 2.4 times through 2005. The drastic deterioration from previous ratios of 2.3 times and 2.8 times, respectively, was the chief cause of the downgrade.

After the S&P downgrade on Monday, Calpine emphasized that it did not trigger any defaults under its credit agreements, but Bob Kelly, president of Calpine Finance Co., said the company was committed to attaining an investment-grade rating with S&P.

Wolinsky said that while Calpine might be able to pay down debt with asset sales or a boost to cash flow, those were probably unrealistic in terms of raising as much as $1.5 billion. More likely, he said, would be an equity issue of that size.

Calpine has not expressed any such plans, however.

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