Barron's article
From the *Current Yield" column
The junk and convertible bond markets tried all week to decipher whether independent power producer Calpine was another Enron, the fallen energy trader. But by week's end, the speculation abated, after Calpine held a conference call, put out a press release and even bought back some of its $1 billion in zero-coupon convertible debt, helping those securities rebound somewhat.
"I think Enron scared a lot of people and it left many with a bad experience," says James Didden, vice president and investment officer at J.W. Seligman. Calpine's actions last week stemmed from a Sunday New York Times article, which drew parallels to Enron, which Didden says "really created more fear in the marketplace."
Calpine's 8 1/2% senior notes of 2008 and 2011, which were trading roughly 94 cents on the dollar prior to the article, were down 11-15 points on Monday and spiraled into the high 60s and low 70s on Wednesday morning. Concurrently, Calpine's zeros, puttable for cash and stock next April 30, fell as low as 85 cents on the dollar, producing an astounding yield to that put date of 47%. But late Wednesday, the converts got a boost after Calpine bought back $122 million of the issue, trading up to 91 1/2, with a yield to put of 24.5%. The zeros ended the week at 93 1/2, with a yield to put of 19.66%, according to ConvertBond.com.
"Enron was a trading business while Calpine has real assets," Didden says. "Its primary business is that of a power generator and it does do some trading to augment that business ... Calpine and Enron are arguably two different businesses."
Many investment-grade and crossover investors were major sellers after the Enron meltdown. Standard & Poor's affirmed Calpine's double-B-plus rating on Wednesday, while Moody's Investors Service cut Calpine's Baa3 senior unsecured debt rating to Ba1 late Friday and placed it on review for further downgrade "pending arrangements to obtain additional financing."
Moody's move comes on the heels of harsh market criticism that the ratings agencies moved too slowly in downgrading Enron to junk. Moody's had just upgraded Calpine to investment grade in October.
Nonetheless, Calpine's straight debt, which was trading in the low 80s late Wednesday, dropped to 73 bid, 77 asked after the Moody's announcement late Thursday. They bounced back to 77-80 hours later, but closed Friday around 75 before Moody's downgrade.
Anand Iyer, head of global convertible research at Morgan Stanley, points out that "at Calpine's current [convertible] price, one can say is that unless the stock recovers dramatically or interest rates go down substantially, the likelihood is very high that the bonds will be put back." Calpine's stock was under selling pressure all week on the expectation that the firm likely will pay investors back in stock, instead of cash, creating massive dilution in the event $878 million outstanding converts are redeemed.
Calpine's stock plunged to 13.20 Friday. At that price , investors would want to put the bonds back to the company because the value of the convertible security put back to the company at par is greater than the trading price of the security at the current mid-90s. Calpine's 52-week high and low are 58.04 and 10, respectively. |
