Integra prices drive-by deal, energy issues spotlighted by $3.3 billion California refunds

By Ronda Fears

Nashville, March 26 - In what many described as a lackluster session, several distressed power names were in the spotlight as federal regulators decided electricity suppliers should refund $3.3 billion to California as a result of alleged price-gouging in the 2000-2001 power crisis.

The refund amount was a third of the $9 billion California officials were requesting so the reaction was mixed.

Mirant Corp., one of the companies in the refund case, dropped sharply although Calpine Corp., another, "held firm" as one trader put it.

A $752 million settlement by Xcel Energy Inc.'s with NRG Energy Inc. creditors was taken as a positive development and the 7.5% issue shot up on the news.

Trading was "on the thin side," however, as a "lack of conviction or any trend" was noted by traders.

"I haven't noticed any blow-ups today," said one hedge fund manager in New York, with a sigh of relief.

"Often it's wise to do nothing. Trading has a cost.

Players were anticipating a "big deal" to be launched after the close, or before Thursday's open, but the name of an issuer was still a matter of guesswork.

Some noted that Comcast Corp. filed a $7 billion shelf on Wednesday, speculating that it may be planning to step up to buy QVC since Liberty Media Corp. has pushed the envelope on the matter.

Others also noted that it could be a managed health care name, as has been mentioned earlier this week.

Before Wednesday's open, another drive-by deal - as has almost become the norm in convertibles lately - was priced from Integra Lifesciences Holding Corp.

Integra sold $100 million of 2.5% convertibles with a 44.89% initial conversion premium - at the cheap end of guidance. Sellside analysts put the deal, at 2.25%, up 42.5%, or the midpoint of guidance, around 3% rich.

The deal sold at par and was quoted closing at 99.5 bid, 100 asked, after trading as low as 99 right out of the gate.

Buyside sources have been commenting for weeks about "extended hours" at the office due to new deals getting launched after the close - some as late at 6 p.m. ET or after.

Now, pre-open pricing has come to pass.

Salesmen and bankers have said a lot of the motivation for pricing deals this way is to set the terms before the shares get hit by hedge funds shorting the stock, in an effort to make execution more palatable to issuers.

"We're seeing more and more of this. I've seen deals get launched later than 6 p.m. and as early as 7 a.m.," said a syndicate source.

"Most people get in between 7 and 7:30 a.m., so it's not that difficult to get a deal placed" before the open, he said. Or, he added, sometimes the underwriter might buy the deal after the close thinking they would get it placed before the open of the following day.

Smaller deals, such as the Integra and HCC Insurance Holding Corp. deals this week, also are easier to get placed in a matter of an hour or so.

Bigger deals could prove more challenging from a logistical standpoint, without multiple book-runners.

While buyside sources have been mildly irked by the "surprise" late-day or early-morning deals, they are more disturbed by the terms of the deals of late.

"These last couple of deals are just ridiculous. I don't need all day to think about that," said a trader on the buyside, whose West Coast firm runs both hedged and outright convertible strategies.

He was not moved by the California power refund case, however.

Traders said initial reactions were positive to the Federal Energy Regulatory Commission just making a decision one way or another.

"Everyone hates uncertainty. If there's a number put on this liability, then at least you have something solid to go on," one dealer said.

Companies named in the FERC investigators' report included Williams Cos. Inc., Calpine and Mirant.

FERC commissioners ruled that California was owed about $3.3 billion in refunds, more than the $1.8 billion awarded by an administrative judge at the agency awarded in December but far less than the $9 billion California wanted.

Mirant's 5.75% convertible due 2007 was quoted down about 3.5 points to 52.5 bid, 52.625 asked. Mirant shares closed down 25c, or 13.8%, to $1.56.

Calpine's 4% convertible due 2006 was quoted up 0.5 point to 65 bid, 66 asked - still propped up by hopes of an exchange offer for the convertibles, although a company spokesman said Wednesday that he could not comment on a matter like that unless a filing had been made, which it hasn't.

Calpine's convertible trust preferreds were the eye-catchers, however, as one dealer noted the three issues were "up anywhere from 1 to 3 points."

Calpine shares closed off 9c, or 2.7%, to $3.21.

Xcel Energy also was sharply higher as it announced a tentative settlement with NRG creditors for $752 million.

The settlement includes a prepackaged bankruptcy filing by NRG as well.

While the amount is more than Xcel's offer of $300 million to the group of bondholders and banks, one trader noted that the payments will be spread out through 2004 and "at least is a step toward breaking free from the trading unit [NRG]."

Xcel's 7.5% convertible due 2007 were bid up around 5.5 points to 134.25 bid, 134.75 asked, the trader said. Xcel shares closed up 99c, or 8.3%, to $12.92.

Standard & Poor's said the settlement is "very positive for Xcel Energy's credit quality," but left the BBB corporate credit rating on watch with developing implications, pending a final agreement and analysis of the settlement payment.

El Paso Corp. also made headlines, as the Commodity Futures Trading Commission announced El Paso will pay $20 million to settle allegations it reported bogus natural gas trades in an effort to skew the market in its favor. El Paso recently struck a $1.7 billion deal with California regulators to settle charges it withheld natural gas supplies in an effort to bump prices during the 2000-2001 electricity crisis.

Traders said there was little movement or activity in the El Paso converts, however.

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