Calpine Cancels Junk Bond, Note Sale

Calpine Corp. on Tuesday canceled a $2.3-billion term loan and junk bond sale crucial to a refinancing plan after it met heavy resistance from investors overloaded with the independent power producer’s debt.

Shares of Calpine fell more than 9% in early trading as investors worried that access to the capital markets was becoming more difficult for the company, which along with its rivals has suffered from falling demand for electricity.

“People are viewing it as a very lower-tier company with plenty of paper,” said Tom Parker, high-yield portfolio manager for Barclays Global Investors. “The market’s just not really looking for more exposure to problem companies.”

The company, based in San Jose, has said the offerings were necessary to refinance existing debt maturing in November at its Calpine Generating Co. subsidiary.

Calpine said Tuesday that it was evaluating different financing alternatives and it remained confident that it could refinance the debt before it matured.

Reuters reported last week that Calpine was having trouble marketing the $1.05-billion junk bond component of the refinancing because many investors already had portfolios bulging with the company’s debt.

Like several rivals, Calpine has suffered from a heavy debt burden, tumbling energy prices and an overbuilt power industry.

According to a recent research note by Clark Orsky, a debt analyst with high-yield research firm KDP Investment Advisors, previous refinancings had bought Calpine some time as it awaited a rebound in energy prices, but predicting the timing of a recovery remained difficult.

With about $17 billion in debt, Calpine is one of the biggest borrowers in the junk, or high-yield, bond market. That heavy debt load made it difficult to find buyers still interested in the name, especially as a rally in low-rated bonds fizzled.

“It was very much hurt by market conditions in that there isn’t a lot of cash coming in and there isn’t a lot of demand for low-rated paper,” Barclays’ Parker said.

Some investors balked at the note offering after Calpine declined to concede to changes in covenants, or borrowing agreements, that would have placed restrictions on dividends and use of asset sale proceeds, said Sean Slein, high-yield portfolio manager for Dwight Asset Management, who does not currently own Calpine debt.

“It’s a question of wanting more freedom than the investment community was willing to give,” Slein said. The company could still get a deal done if it tightened covenants and paid higher yields, he said.

A Calpine spokeswoman said the company was not commenting on specific financing alternatives.

Calpine had planned to pay yields of 11.25% on a $525-million portion of fixed-rate notes, market sources said. The offering was also to include $525 million of floating-rate notes and a $1.3-billion term loan.

Jon Cartwright, director of investment research at BOSC Inc., said Calpine had three financing alternatives now that this deal had fallen through.

“They can come back to the public junk bond market, they can try to place this debt in a true private placement or they can find a consortium of banks that are willing to take on the debt,” he said.

Shares of Calpine on Tuesday fell 42 cents, or 7.3%, to $5.31 on the New York Stock Exchange.