Calpine converts "falling apart" on refinancing concerns; record oil prices turn heads

By Ronda Fears

Nashville, May 14 - Convertible players by Friday were beat, beat up and many beat a trail out of the office early Friday. Technology and telecom paper continued to get pummeled, traders said, and several retail issues were among the big losers of the day.

Yahoo! Inc. was one of the tech decliners, though not the biggest, as it revealed plans to liquidate its 5% stake in rival Google when the internet search engine goes public, estimating the stock is worth "several hundred million dollars." The Yahoo convertibles dropped about 1 point while the stock edged 13 cents lower to $26.97.

As oil prices hit a record, traders said there was interest in the convertible paper of that sector but not many buyers as most of it is still pretty expensive. There were some lookers in the oil, drilling and gasoline groups, traders said. Calpine Corp., an independent power producer, was sharply lower, however, on refinancing concerns.

Oil prices and, more specifically, the price of gasoline extracted from oil is a major component in inflation, but the April numbers were rather tame, traders said. Crude oil topped $41 on Friday and gasoline prices were at a record level, just ahead of the summer travel season.

The consumer price index, a strong indicator for U.S. inflation, was not a big number, dealers said, but the data could be fodder for any argument the Federal Reserve might make in June for an interest rate hike. The Labor Department reported the CPI edged up just 0.2% in April and the core CPI, excluding food and energy, was up just 0.3%.

"It was a rough week, everybody just wanted it to be over," said one dealer.

Another sellside market source commented, "Everyone will go home and lick their wounds over the weekend, have some beers and come back next week hopefully to a more stable market."

Thus, being Friday, it was quiet on the new issue front, as well.

Calpine off 10 points for week

Calpine still has a good ways to go in its refinancing efforts, and mounting concerns about its ability to tap the capital markets has sent its convertibles crashing lower, buyside traders said. A sellside market source referred to the situation, saying "Calpine is falling apart."

In the past week, the Calpine convertible bonds have lost 10 points and are down more than 20 points from the 90s level two weeks ago, a buyside trader said. The 4.75s dropped 2 to 3 points on Friday, he said, to about 69 bid, 70 offered with the stock closing down 7 cents, or 2%, to $3.30. He noted that the stock hit $8 earlier this year.

Calpine's convertible preferreds were severely hit, he noted, because those issues have been considered the next in line for refinancing. Those fell more than 4 points Friday to 39, the trader said.

"The glass houses that some people have set up camp in are now shattering," he said. "Calpine had trouble getting a junk bond deal done earlier this year when its stock was at a 52-week high, so it's going to just get harder for them."

The San Jose, Calif., power firm just refinanced some project debt and has refinanced its old 4% convertibles with the 4.75% bonds. In March, Calpine subsidiary Calpine Generating Co. LLC (CalGen) sold $2.4 billion of new bank debt and bonds - just weeks after a buyers' strike forced it to scrub a similar financing effort.

Oil, gasoline issues scarce

Oil and gasoline prices are eye-popping but the few convertibles in those sectors are still pretty rich. Moreover, there's just not much paper from those groups.

June crude settled Friday at a record high of $41.38, up 30 cents, after hitting the $41.50 mark at one point of the session. Wholesale gasoline for June delivery also settled at a new high of $1.4101 a gallon, up 0.96 cent, and AAA reported Friday that retail gasoline prices for the week ended May 7 averaged $1.953 a gallon.

Declines in gasoline inventories for the week ended May 7 and a report that showed a drop in crude stocks fueled concern that OPEC would not be very cooperative in any attempts to bring oil prices down.

And, oil stocks rose in tandem, along with the stocks of refiners.

"I haven't seen a whole lot of activity in the E&P names or in the drillers, either. I think a lot of folks don't believe that $41-a-barrel oil is sustainable, so they're hesitant to put money into the sector. Of course, that's what everyone said when oil was at $35 a barrel," a sellside market source said.

"From a credit perspective, I still like most of the drillers. Most are solid investment-grade names with low debt to capital and healthy projected cash flows. Several of the E&Ps are good credit quality companies, too, although concerns over reliability of proven [versus] undeveloped reserves are pressing the names a bit.

"Seems to me the best way to pay [for the] rising cost of oil would be with the majors, but there's no convert paper."

Indeed, a buyside source said what little energy paper there is in the convertible universe is expensive.

"We're light on energy, simply because few energy convertibles appear interesting," said a fund manager in New York. "We see a few over-rated credits trading at surprisingly low yields and surprisingly high premiums - consequently, with little potential return."

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