Calpine's second-lien term loan dropped five points to the 76-77 range and its 8.5% '08 bonds fell 11 points to 61.75 after the company knocked heads with its creditors last week. Angry holders of Calpine's first-lien debt stopped the company from withdrawing proceeds from the sale of natural gas assets because the company did not pay them back at above par in a tender offer it did in June. "They had a chance to get paid back at par," said an analyst. "They were greedy. Now it is a case of sour grapes because they did not get what they wanted." Calpine said in a statement that it is evaluating its options in response to the letter and intends to pursue its legal rights to resolve the dispute. At press time Friday, the firm had reportedly hired a law firm to push its position, but the name of the firm could not be determined.
According to Calyon Securities, the account containing the proceeds from the sale of natural gas assets is down to $395 million from $760 million. In a research note, Calyon said this suggests that Calpine has "already 'recycled' $313 million of asset sale proceeds into operating cash flow." Calyon said in the report that asset sale proceeds in the escrow account can only be used to redeem secured debt at par or better, but operating cash flow can be used to repurchase any debt at prevailing market discounts.
"Using OCF [operating cash flow] to buy back unsecured debt maturing in 2008 at 70 cents on the dollar is obviously far better for the overall capital structure than using asset sale escrow funds to buy back first-lien debt due in 2014 at a premium to par," according to Calyon.
Last week, the senior secured note holders sent a letter to Calpine informing the company that they will block the release of $117 million Calpine wants to draw down from the escrow account to buy gas fuel. Calpine said it is permitted to use the proceeds from the sale of its gas assets to buy natural gas. Calpine has already used $360 million of the proceeds to buy gas fuel.