Reliant gains on switching out of Calpine; CenterPoint easier; Delta better; ViroPharma gains

By Ronda Fears

Nashville, Aug. 24 - While mild weather across the United States has done nothing for power producers this summer, many investors are hoping that the colder-than-normal pattern will extend into winter. Hoping is key because convertible investors are switching out of more risky names like Calpine Corp. into safer bets like Reliant Energy Inc., a market source said.

In that vein, a convertible trader said there was good two-way action in CenterPoint Energy Inc. as buyers like that credit, too, but there also was some selling out ahead of a Texas regulatory commission hearing on recovery costs related to Texas Genco Holdings Inc., which CenterPoint is in the process of selling.

Separately, Delta Air Lines Inc. bonds were better as the committee of senior secured creditors demanded more information on the company's restructuring plans before giving consents being solicited by the airline to effect the restructuring. The convertibles are still hovering in the high 30s to 40 while some of the Delta junk bonds shot back up to the mid-40s.

ViroPharma Inc.'s convertible, which some may recall failed to get enough participation for the company's exchange offer back in June, shot up another 1 to 1.5 points Tuesday after a 7-point gain Monday on a drug licensing deal with Schering-Plough Corp.

Several phone issues were also mentioned in secondary action - as the primary remains ultra-quiet - in the wake of the Federal Communications Commission ruling to continue to force Baby Bells to share their lines with competitors like Covad Communications Group Inc. and Level 3 Communications Inc. for at least another six months.

Overall, players said the market feels a little better.

"There are some people trying to get a jump on the post-Labor Day rush, if there is one," one market source said. "There's some bottom-fishing going on, trying to get positions set up before everyone comes back from vacation."

Delta consents held back

A committee of Delta senior secured lenders holding roughly $1.3 billion of the airline's paper said Tuesday there will have to be substantial information on the company's business plan, financial condition and restructuring plan supplied before they proffer any consents for the exchange Delta has offered equipment trust certificate holders.

"These things [consent solicitations] can go on forever, even though there's a deadline set they are open-ended insofar as they can extend them indefinitely," said a convertible dealer.

Withholding consents for more information, he said, will let all Delta debtholders in on whatever details might surface as a result of that strategy.

"The first shot [by Delta to get creditors' waivers for the exchange] was meant to satisfy the pilots, to show them that other people involved in this process are making concessions. But without anymore information, or a new pilot contract, it was never going to fly anyway," the trader said.

"So, the debt holders will wait until the [pilot] contract is inked, or the company will have to cough up some more details about what they are planning for the rest of the debtholders."

Right now, he said, there is not a lot of volume in the Delta converts, saying the sentiment prevailing is that "if you own the bonds, you might as well keep 'em.'"

The Delta 8% convertibles were up about 1 point, and the 2.875% converts added about 2 points. Delta's junk bonds rose in the neighborhood of 4 points. Meanwhile, the stock gained 7 cents, or 1.67%, to $4.26.

ViroPharma recovers sharply

ViroPharma's 6% convertible due 2007, which remains in play as the company could not get an exchange offer to pass muster with holders earlier in the summer, shot up Tuesday to around 65.5 bid, 67.5 offered. That was a gain of about 1 to 1.5 points, which followed a spike of 7 points Monday.

On Monday, Schering-Plough exercised its 2003 option to license an intranasal form of ViroPharma's pleconaril to treat the common cold in the U.S. and Canada, which means $10 million in license fees plus the eligibility for another $65 million from commercial milestones and royalties.

In addition, Schering-Plough will buy ViroPharma's existing inventory of the drug.

In late June, the ViroPharma exchange bombed and in the convertibles slumped to around 70 offered, and since then have slid with the rest of the biotech pack of convertibles. ViroPharma had offered to exchange up to $99 million of new 6% convertible senior "plus cash" notes due 2009 for all of its $127.9 million 6% convertible subordinated notes due 2007.

Market sources had been saying for months, almost ever since the exchange effort began in March, that the holders wanted more than the company was willing to pony up. It was a condition of the exchange that at least 80% of holders participated in the offer, but only 3.7% of the issue was tendered by June 24 even after two extensions.

ViroPharma shares on Tuesday added 14 cents, or 6.51%, to $2.29.

CenterPoint lower by 1-2 pts

Ahead of the Public Utility Commission of Texas meeting Monday where the request of CenterPoint and Texas Genco to determine stranded costs and other so-called "true-up" balances will be heard, CenterPoint's convertibles were seeing good two-way action, traders said.

There is some concern about how the Texas regulators' decision might affect CenterPoint's $2.5 billion to $2.9 billion sale of Texas Genco, one trader said, but at the same time there were long-term buyers moving in for the investment-grade (BBB) issue.

"It's just a little nervousness going on before the ruling," he said. "On the flip side, there were people buying, too, because it set up a buying opportunity on the weakness. No matter how it [the regulator decision] goes, the long-term power players would want this issue and a dip will get pounced on."

CenterPoint's 3.75% convertibles were off about 2 points to 112 bid, 113 offered, and the 2.875% converts dropped 1 point to 105 bid, 105.5 offered. The stock was down 21 cents, or 1.92%, to $10.75.

It's not a matter of the sale proceeds getting used to take out the converts, as market buzz has suggested, because "all that money is going to the banks," he pointed out.

In July, CenterPoint announced the sale of Texas Genco to GC Power Acquisition LLC, a newly formed entity owned in equal parts by affiliates of The Blackstone Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Texas Pacific Group, for about $3.65 billion in cash. But CenterPoint is required under its loan agreement to repay borrowings and reduce the amount available under its $2.3 billion credit facility with those proceeds. In fact, until the company's credit facility has been reduced to $750 million, all of the net cash proceeds from any securitizations relating to the recovery of the true-up components and net cash proceeds from Texas Genco must go toward bank debt reduction.

Texas Genco is one of the largest wholesale electric power generating companies in the United States.

"The only problem with upcoming legal decisions is the uncertainty," said a buyside convertible trader, who was looking to sell CenterPoint converts. "A harsher ruling or something unexpected could bring it down further, so we'd just as soon move on if we find some buyers" for the CenterPoint converts.

Power players look for safety

With the possibility of a harsh winter, traders said the power space has been more active in the past week or so with buyers for Reliant as well as CenterPoint.

"Natural gas has been suffering as of late, because of the wonderful weather and tough oil situation. It won't continue for that much longer. I guess I'm looking to do a little bottom-fishing," the buyside trader, who was selling CenterPoint converts, said.

Reliant's 5% convertible due 2010 is deep in the money but the premium is low and the spread of 500 basis points over Treasuries offers some room, a sellside desk analyst said. The issue was steady at 131.5 bid, 131.75 offered with the stock unchanged at $9.71.

Yet, because the weather forecast is not exactly reliable, traders also have been seeing selling in Calpine - last week to move into secured paper of the independent power producer and this week into other power convertibles.

Calpine's 4.75% convertibles dropped about 1 point on Tuesday to 73.5 bid, 74 offered. The stock was off 6 cents, or 1.75%, to $3.36.

"Since Calpine's only means of improving liquidity has been asset sales and contract monetizations, which significantly reduces future profitability, it's a lot more risky than we're willing to tolerate going into the winter," the buyside trader said on getting out of Calpine.

"Calpine has a lot going for it, but we closed out our position until the smoke clears. The mainstay of Calpine's business strategy - cheap, abundant natural gas, fair competition and environmental pressures to close [competitors'] older plants - have not yet materialized to the degree necessary."

Still, a Calpine cheerleader pointed out that, in June, Calpine said several West Coast states are facing possible power supply shortages and Calpine's portfolio of plants in operation, under construction and in development, could meet 15% of California's electricity capacity and produces 10% of California's natural gas needs. That, the high-yield fixed-income fund manager said, could bode well for Calpine going into a rough winter.

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