Calpine, AES firm in quiet trade; market ignores PacGas ruling; UCAR upsizes

By Paul Deckelman and Paul Harris

New York, Feb. 8 - Bonds of independent power producers Calpine Corp. and AES Corp were seen firmer Friday, although in quiet trading; meanwhile there seemed to be little or no market reaction to a federal bankruptcy court judge's ruling quashing Pacific Gas & Electric Co.'s efforts to shield itself from state regulators as part of its Chapter 11 restructuring

In the primary market, of the three deals expected to price, terms emerged on two.

UCAR International, Inc., the Wilmington, Del.-based carbon products company, upsized its offering to $400 million from a planned $250 million. Issuing through its UCAR Finance, Inc. unit, the company priced 10-year senior notes at par to yield 10¼% via Credit Suisse First Boston, and J.P. Morgan.

Throughout the week investors and sell-siders passed mostly favorable comments along to Prospect News about UCAR. It was noted that the company, which spun off from Union Carbide in 1995, manufactures graphite electrodes, one of which is consumed every eight to 10 hours in steel mini mill furnaces.

Word had it that the company also worked hard during its roadshow to convince investors that it now sees the light at the end of the tunnel regarding the extensive fines that regulators in the U.S. and Europe slapped on it, stemming from antitrust action dating back to 1998. A company official told Prospect News that UCAR, which had already reached an agreement with stateside authorities, received "final certainty" from European regulators, last summer, regarding its €50 million fine.

Terms also were heard Friday on Hanger Orthopedic Group's $200 million of seven-year senior notes. The Bethesda, Md.-based orthopedic and prosthetic services provider and components manufacturer priced its new paper at par to yield 10 3/8% via joint bookrunners Lehman Brothers, JP Morgan and Salomon Smith Barney.

Meanwhile, Bluewater Energy Services BV's $200 million of 10-year senior notes, which were expected to price Friday, were moved back onto the calendar for the week of Feb. 11. One syndicate source told Prospect News that talk had widened to 10¼%-10½% from 9¾%-10% and that Morgan Stanley moves up from being a co-manager to being joint bookrunner with ING Barings, previously the sole bookrunner.

The Netherlands-based offshore oil services company was scheduled to present to investors over the Feb. 9-10 weekend, the official said.

Hence the week of Feb. 11 came to an end having seen dollar-denominated new issuance totaling $894.57 million and €180 million in proceeds. With the week's end, year-to-date dollar-denominated new issuance through Feb. 8 tallies up to US$8.286 billion, according to Prospect News data.

David Eshnaur, portfolio manager of the Buffalo High Yield Fund, said he remains cautious, saying the high yield market through the first half of 2002 would likely continue to be "choppy."

"My opinion hasn't changed," Eshnaur said. "The high yield market started out of the gate pretty fast at the beginning of the year and it's been pretty choppy the last three weeks. I think we're going to see more of that. I think it's going to be headline-driven."

Eshnaur told Prospect News that he is familiar with the perception on the sell-side that investors have cash that they need to put to work in the high yield. And he conceded that to a certain extent that perception might be valid. Eshnaur, however, said that he intended to proceed with considerable caution. The only deal on the forward calendar he said he would take a look at is Williams Scotsman, Inc.'s $100 million add-on, set to price Feb. 14.

"My job is to wisely and prudently invest," Eshnaur stated. "I never feel like I just gotta invest.

"People want high dividends in the high yield funds," he added. "And ours is getting crimped a little bit. But we think it's more prudent to gradually put the money to work."

Eshnaur also said he anticipates new issuance volume in 2002 to slightly exceed that of 2001 "just because there's some deals that got stacked up at the end of the year, and there's probably some banks that want to see some high yield guys refinance."

Among the eight deals expected to price during the week of Feb. 11, terms on Kamps AG €300 million seven-year senior unsecured notes, with price talk in the 8½% area, are expected on Monday via JP Morgan.

The market anticipates hearing price talk Monday on Fla.-based supermarket tabloid publisher American Media Operations, Inc.'s $150 million add-on, also via J.P. Morgan.

And in addition to the above-mentioned business from Bluewater Energy Services and Williams Scotsman, credits expected to price during the week of Feb. 11 include Graphic Packaging International Corp., bringing $250 million via joint bookrunners Credit Suisse First Boston and Morgan Stanley, American Achievement Corp. selling $175 million through Deutsche Banc Alex. Brown, Tandus Group, Inc. (Collins & Aikman Floorcoverings) with $175 million via joint books Credit Suisse First Boston and Banc of America Securities, and New World Restaurant Group's $155 million via Jefferies.

In all, the market anticipates $1.205 billion and €300 million to price during the week of Feb. 11.

In secondary trading, Calpine's debt ended an eventful week quietly pushing about a point higher across the board, its 8 7/8% notes due 2010 quoted up about two points to just under 79 bid. Calpine's 8½% notes due 2011 were quoted up as much as three points on the session, near 80 bid.

Earlier in the week, the San Jose, Calif.-based independent power producer's bonds had fallen as low as 72 bid, after the company disclosed that the Securities and Exchange Commission has begun an informal inquiry as to whether Calpine had improperly disclosed financial information to analysts before making it public.

But company officials were quick to deny any improprieties, looking to nip in the bud any market sentiment that might lump it in with other companies whose book keeping or whose reporting of financial data seems fishy - notably Enron Corp., which has been pilloried for a wide range of alleged accounting and reporting sins.

The game plan apparently worked; following Wednesday's disclosures, which dropped the bonds and the shares, the quick company disavowal of any wrongdoing helped turn things around on Thursday, and again on Friday, when Calpine shares continued to rebound, ending New York Stock Exchange dealings up 26 cents (3.19%) to $8.40, on volume of 19 million shares, slightly more than usual.

Besides its own assertions that it had acted properly, Calpine securities was helped over the two-day rebound by the opinions of a number of equity analysts, who felt its 22.29% drop Wednesday to a new two-year low of $6.80 had been overdone. Calpine further helped its own cause Friday with its announcement that it had bought back $119 million of zero-coupon convertible debentures scheduled to mature in 2021 in the open market over the past several sessions, using cash on hand to fund the buybacks. The debt repurchase could be seen as a signal to the market of Calpine's commitment to lower its debt, streamline its balance sheet and perhaps even bolster its credit ratings, currently at Ba1/BB+ for its senior unsecured notes. Calpine's use of available cash for the paydown is likewise an indicator of the company's confidence in its own liquidity position and its ability to tap the capital markets should the need arise.

AES, meanwhile, was quoted at one desk up at least a point across the board, and at another, its 9 3/8% notes due 2010, which had fallen eight points over the previous two sessions to around 75 bid, were seen trading as high as 78.25. Its 8 7/8% notes due 2011, which had fallen to around 71 bid Thursday, had recovered to around the 75 area by Friday.

The Arlington, Va.-based power producer had posted fourth-quarter net earnings, including various charges and gains, of $44 million (8 cents a share), down 80% from $224 million (43 cents a share) a year ago. Among the charges was $26 million in currency exchange losses related to the collapse of Argentina's peso. But a news report Thursday indicated that AES was moving to stanch its losses in the troubled Latin American nation by backing out of a deal to buy out another company's stake in several electric utilities there.

AES shares, meantime, which had rebounded modestly Thursday from their 14.06% drop on Wednesday - the day the earnings data came out - were back in negative territory Friday, down 27 cents (2.63%) at $10.01.

Also in the power sphere, a federal bankruptcy judge on Friday lashed into Pacific Gas & Electric Co. For what he called an "across-the-board, take-no-prisoners" strategy to transfer some $8 billion in assets, including conventional and nuclear power plants, hydroelectric dams, electricity and natural gas transmission networks and thousands of acres of land, to three newly-formed subsidiaries of PCG Corp., its parent company. By moving those assets to the federally regulated PCG, they would no longer be under the control of PacGas, which is heavily regulated by California's state public utility agency.

The latter strenuously opposed PacGas' reorganization plan, contending it was a scheme to escape state oversight and to be in a position to sock it to consumers, whose rates are currently regulated by the utility panel. Pacific G&E, on the other hand, said that getting out from behind the California Public Utility Commission's shadow would be the only way it could be in a position to pay off its creditors, who are owed a total of $13 billion.

Judge Dennis Montali of the federal bankruptcy court in San Francisco wrote in his decision, handed down late Thursday, that "there is no express preemption of nonbankruptcy law that permits a wholesale unconditional preemption of numerous state laws."

But while the regulators and consumer advocates claimed victory and proclaimed the utility's plan to be dead on arrival, the jurist left the door open for something like the utility's plan - if Pacific Gas can convince him that making the change would be the only way it can become financially solvent once again.

The potentially crucial ruling, however, had virtually no impact in Friday's bond market action. A trader said the decision did "not particularly" affect trading in the utility's bonds. He said it was "kind of tough" to discern any impact, as "there wasn't a whole lot of trading in these things, other than an odd lot here and there."

He opined that there probably wouldn't be a dramatic effect on the bonds over the next session or so, while allowing that "we'll know when there is a little bit of trading."

One observer said he had not seen any markets in the PacGas debt, quoting its short-dated unsecured notes as continuing to hover in the 98-par bid range.

"I guess with a negative connotation like that, it might have some impact on the bonds" going forward, he projected, although he reiterated that he had seen none in Friday's dealings.

The plan to split the utility into four units - the three essentially unregulated (by the state) subsidiaries of the parent company, which would own the generating and transmission assets and the fourth, the remnant of PacGas, which would distribute electricity and gas to consumers under CPUC regulation "would, from an analytical perspective, create different books and different accounting principles for each company, and that might have an advantageous effect on the company," he said. "So if they wouldn't have the ability to do that, I could understand where that could have an adverse effect on the company and what they want to do." But that adverse effect had not shown up in Friday's activity.

Oddly, he saw some of the company's secured paper quoted at somewhat lower levels than the unsecured notes, such as PacGas' 5 7/8% first mortgage notes due 2005, trading in a range in the mid-90s, but he attributed the difference to the longer maturities on some of the secured debt.

"Perhaps (investors) believe that the company will have the money to pay off the short stuff, but they're not so sure about two, three, four years down the line," he explained.

Outside of the power-generating sector, a trader said that Williams Communications Group Inc. "continues to be ugly," quoting the Tulsa, Okla.-based long distance operator's 10 7/8% senior notes as having fallen back to around the 22-23 bid area from prior levels around the mid-20s. He also saw Level 3 Communications Inc.'s benchmark 9 1/8% senior notes due 2008 "still trading in a 35-38 context," while Nextel Communications Inc.'s bonds, such as its 9 3/8% notes due 2009 were "still sitting around in the mid 60s."

Another trader saw AT&T Canada Inc.'s bonds "up significantly," quoting the Candian-based telecommunications broadband operator's 7.65% notes having advanced to 25 bid/26 offered from prior levels around 22 bid/23 offered, while its 9.95% notes firmed even more, going to 20 bid/21 offered from prior levels around 14 bid/16 offered.

While AT&T Canada continues to labor under the uncertainty over whether corporate parent AT&T will, in fact, buy out that portion of the company which it does not yet own (running against a June 30, 2003 deadline) and whether Ma Bell will assume responsibility for the Canadian operation's debt - something it has so far indicated that it is not obligated to do - the company had some strongly positive news during the week for its investors.

It reported that fourth-quarter 2001 EBITDA (earnings before interest, taxes, depreciation and amortization, a key bond market measure of cash flow and ability to service debt) totaled $65.6 million, including a $31.9 million adjustment affecting the company's pension expense. Excluding this item, EBITDA was $33.6 million - an increase of $22.6 million from fourth quarter 2000. AT&T Canada credited the EBITDA improvement in part to lower service costs from changes to the contribution regime. Full-year EBITDA was $153 million, or $121 million before the pension expense adjustment, compared with $58.6 million in 2000.

The trader noted that with its ratings still hanging in at Baa3/BBB, AT&T Canada looked like a far better investment than the money-losing Williams Communications, selling at around the same levels but far lower-rated. "Investors may want to swap out of the Williams paper and into AT&T Canada," he suggested.

Back on the downside, Primedia Inc.'s 8½% notes due 2006 fell more than three points on the session to 85 bid, after the New York-based magazine publisher reported a fourth-quarter net loss of $628.3 million ($2.60 a share), sharply wider than its loss of $270.6 million ($1.62 a share) a year earlier.

The latest results include non-recurring charges, a provision for severance and a charge for impairment of assets. Apart from those unusual items, the company lost 49 cents a share, versus 11 cents a share of red ink a year ago. Analysts had projected a 35-cent-per share loss.

Overall, activity on Friday was muted. "We were just sitting around most of the day, looking at each other," a trader quipped.

As has been the case over the past several weeks, there was little market reaction to the latest high yield mutual fund flow numbers released by AMG Data Services. In the week ended Wednesday, some $80.7 million more left the funds than came into them. The week before, inflows had totaled $240.5 million. Many market participants see the weekly statistics as a reliable barometer of overall liquidity trends.

In the past three weeks, the fund flows seemed to have zigzagged, after having posted three straight weeks of inflows to start 2002. With inflows having now been seen in four of the first six weeks of the year, inflows have totaled $1.674 billion so far, off from a $1.761 billion cumulative total the week before.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.