Calpine falls on profit warning; Extendicare, PCA deals price

By Paul Deckelman and Paul A. Harris

New York, June 20 - Calpine Corp. bonds were lower Thursday, after the power generating company warned that it faces "a challenge" to meet its 2002 profit projections due to lower margins.

Two offerings priced during Wednesday's comparatively low level of activity in the high yield primary market, as terms were heard on Extendicare Health Services' offering as well as on the resurrected seven-year senior note sale from PCA International.

However, Copamex, the Monterrey, Mexico paper company, cited market conditions as it postponed its deal Thursday.

Extendicare Health Services, Inc. priced its $150 million of eight-year senior notes (B2/B-) at 99.75 to yield 9.545%, towards the lower end of the 9½%-9¾% price talk. Lehman Brothers ran the books.

The long-term health care services provider, a wholly-owned subsidiary of Markham, Ont.-based Extendicare, Inc., is one of two such firms in the high-yield market with new deals in the last week of spring 2002. The other is Atlanta, Ga.-based Mariner Health Care, Inc., which is also bringing an eight-year deal. Mariner's $150 million of senior subordinated notes (B3/B-) are talked at 10 1/8%-10 3/8%. Although terms on Mariner were expected by some to emerge Thursday, a syndicate source cited logistical snags as the reason the deal is now Friday's business.

When the new Extendicare paper was freed for secondary trading, it firmed slightly to 100.25 bid/101.25 offered from its issue level earlier in the session at 99.75.

North Carolina-based portrait taker PCA International, which took its offering of $200 million of seven-year senior notes (Caa1/B-) out of the market in late April, posed once more for investors on Thursday, with a slightly downsized $165 million of, again, seven-year senior notes, this time with ratings of B3/B-.

The deal, via Goldman Sachs & Co., priced at 98.218 to yield 12¼%, wide of the 11¾%-12% price talk.

Early in Thursday's session the market heard that Copamex SA de CV postponed its offering of $200 million seven-year senior notes (B2/BB-/BB) via Salomon Smith Barney. Price talk on the notes was 12½%-12¾%.

In postponing the deal - proceeds of which were slated to repay debt including refinancing its $200 million outstanding 11 3/8% senior notes due 2004 via an exchange offer for the new notes and/or through a cash tender offer - the company cited "market conditions," according to a syndicate source.

Looking forward, the first day of summer figures to see just over three-fourths of $1 billion of dollar-denominated business price.

In addition to the Mariner Health $150 million, terms are expected Friday on Buffets, Inc.'s $260 million of eight-year senior subordinated notes (B3/B) via Credit Suisse First Boston, Spartan Stores, Inc.'s $200 million of seven-year senior subordinated notes (B3/B) via Lehman Brothers, and a euro/dollar two-part offering from Los Angeles-based personal care products maker Herbalife International, Inc.: $150 million and €100 million of eight-year senior subordinated notes (B3/B) via UBS Warburg.

Back among the already established issues, Calpine's bonds were being quoted down four to five points by the end of the session, with its 8½% notes due 2011 falling to 74.5 bid and its 8 5/8% notes due 2010 finishing at 76 bid. Calpine's shares dropped $1.02 (11.59%) in New York Stock Exchange trading, to end at $7.78.

The San Jose, Calif.-based independent power producer's chief operating officer, James Macias, was quoted by news services as having told an energy industry conference in Santa Barbara, Calif. on Thursday that it would be challenged to meet its earnings forecast of $1.50 to $1.60 per share for the full year, because of weakness in spark spreads - the difference between the price of fuel a utility company uses to produce electricity and the price it can sell the electricity for. The company's average spark spread for the first quarter was $23.96 per megawatt-hour, well down from its $40.53/MWh spark spread a year earlier, and those margins have continued to shrink.

Among the factors which energy industry watchers cite for the lowered margins are lower demand for power in a slower economy, higher prices for the natural gas companies like Calpine use to fuel their generating plants, and a glut of hydroelectric-generated power in the Pacific Northwest region.

The $1.50 to $1.60 per share earnings which Calpine expects to have trouble meeting itself represents a retreat from prior targets in the $1.70 range; Calpine lowered its guidance to present levels back in April.

Other electric generation junkers were also lower Thursday in apparent sector sympathy with Calpine. AES Corp., whose bonds had shot up about four to five points on Wednesday in response to the appointment of Paul Hanrahan to replace Dennis Bakke as chief executive officer, fell back from those peaks on Thursday. The Arlington, Va.-based global power producer's 8 3/8% notes due 2007 were quoted two points lower, at 55 bid.

Those bonds had also firmed Wednesday on Hanrahan's bold promise to raise $1 billion through asset sales and/or new equity and to keep de-levering the company until its bonds went back up to par trading levels and eventually gained an investment-grade rating.

Another energy generation credit in retreat Thursday - which had also been on the upside in Wednesday's dealings - was Dynegy Inc. Its bonds had gone up between six and eight points during Wednesday's session, apparently given a boost by the Houston-based company's plans to cut costs by laying off about 6% of its workforce, and by the replacement of its chief financial officer, Rob Doty, by Louis Dorey, former head of Dynegy's gas and power marketing business. But that bounce in the company's bonds - nominally investment grade at Baa3/BBB but recently trading like junk debt - proved to be short-lived; a market source on Thursday quoted Dynegy's debt "down a bit," its 8¾% notes due 2012 falling to 82 bid from 86 previously.

Dynegy on Thursday announced the shutdown of its Dynegydirect online energy trading system, a move which most observers attribute to the shrinkage in the energy trading market kicked off by the collapse last year of Dynegy's cross-town rival, Enron Corp., and credit concerns about many companies in the energy generation and trading business. Also continuing to weigh the industry down is the fallout from recent disclosures of bogus "round-trip" power contract trades involving Dynegy and other firms such as CMS Energy Corp. Those trades produced no economic value but artificially inflated trading volume and revenue statistics.

CMS bonds were also lower Thursday; its 7½% notes due 2009 retreated more than two points to close at 83.

Outside the power and energy trading area, WorldCom Inc.'s bonds once again were on the slide, just as they have been ever since the Clinton Miss.-based telecom giant acknowledged that it probably would not complete negotiations on its new $5 billion bank credit line by its earlier target of June 30, which in turn led to a two-notch Standard & Poor's ratings downgrade.

WorldCom's benchmark 7½% notes due 2011, which have steadily declined from recent peak levels above 50 bid, were down another point to point-and-a-half Thursday, a trader said, pegging the bonds at 43.5 bid/44.5 offered. A distressed-debt trader also saw its longer-dated paper, such as its 8¼% bonds, down two points, at 39 bid/40 offered, although he opined that "these were normal gyrations, normal flows - nothing really big.

He also saw Adelphia Communications Corp. - whose bonds had recently been firming even as it missed new interest payments and moved closer to a bankruptcy filing - as weaker on Thursday, its senior bonds finishing in the 50-51 bid area.

A second trader saw Adelphia as mostly unchanged or down a half. He said there was little real market response to Adelphia's official default as of this past Monday on some $45 million of interest payments on two series of bonds; those coupon payments had originally been due on May 15 but were not made by the cash-strapped Coudersport, Pa. -based cable operator within the standard 30-day grace period. "Everyone expected" that the payments would not be made with the company so close to bankruptcy. A filing is expected as soon as Adelphia finalizes its debtor-in-possession financing, which will allow it to continue operations as it sells assets and restructures its operations in an orderly way.

Amkor Technology Inc.'s 9¼% notes due 2006, which had been quoted down two points Wednesday to around 86 bid in line with a $1.85 (21%) dip in its stock price to $7 on general investor angst about the semiconductor sector, regained some of its lost ground Thursday, the notes finishing up half a point at 86.5.

Overall, a trader said, "the market felt better in the morning, but then came in as the Dow went down." Dragged lower by a slide in General Motors, the bellwether U.S. equity index slid 129.80, or 1.4%, to 9,431.77 Thursday, its lowest close since Nov. 2.

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