The high yield market was sloppy last week, afterCalpine Corp. canceled a large offering on Tuesday. Investors note that the market is perhaps finally taking a breather after such a long rally and say they are demanding more yield on riskier names.
Energy company Calpine Corp.'s 8.5% notes of '08 fell from 81 to 77 prior to the company's decision last Tuesday to cancel a $2.3 billion new offering. The cancellation wasn't enough to get the bonds to rally. One investor says investors are saturated with the name because Calpine has come to market so many times. And, despite an apparent improvement on the technical side, they say Calpine still has a heavy burden of outstanding debt it needs to refinance--meaning its overall debt profile is not likely to improve. Greg Sullivan, head of sales at BNY Capital Markets, notes that Calpine contributed to overall sloppiness in the high-yield market.
Bonds of Northwest Airlines and Delta Air Lines dropped a couple points. Delta's 7.9% notes of '09 traded at 73 in the middle of the week, while Northwest's 10.5% notes of '08 moved down a couple points to 82. Both airlines need to renegotiate their pilot and flight attendant union contracts and both are out of line with the restructuring which has occurred in the industry, with costs and revenues out of balance, according to one analyst. Also, the pilot contracts at Delta are not amenable until mid-2005, putting negotiating leverage in the hands of the pilots and causing greater concern about the company's finances, he adds. Northwest is also hurt by rising fuel prices and is spending more on it than other airlines because it did not hedge itself, he adds.
Denim Is Back
Levi Strauss & Co.'s 7% notes of '06 strengthened from 66 early in the week to around 69 by Thursday. Thomas Razukas, an analyst at Fitch Ratings, notes the company plans to release a long-awaited earnings report, which is positive. The report has been delayed for several weeks and Razukas says Fitch has been concerned with the lack of information and uncertainty. He explains there is concern that the hiring of Alvarez & Marsal, a restructuring firm, might lead to a debt restructuring. "Our fear is that the requirements of existing debt may be adjusted as a result of the financial problems they are facing," Razuka adds. Fitch rates the senior secured bonds triple-C plus, with a negative outlook.