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Analysts, Traders Work To Value Calpine's Debt Tangle

Analysts were busy last week trying determine recovery levels of the various piece of Calpine's debt while investors, mainly hedge funds, made arbitrage plays on the beleaguered independent power provider.

Analysts were busy last week trying determine recovery levels of the various piece of Calpine's debt while investors, mainly hedge funds, made arbitrage plays on the beleaguered independent power provider. Stephen Moyer, analyst in at Beverly Hills-based boutique investment firm Imperial Capital, said his outfit has traded, on behalf of clients, several hundred million dollars of Calpine's debt since its announcement that CFO Bob Kelly and CEO Peter Cartwright had made an exit. Officials at Calpine did not return calls.

Moyer declined to specify the nature of the trades, but one New York hedge fund manager said second-lien notes at the holding company level are being scooped up feverishly in the secondary market in the high-70 context. "People love the second liens because they think it's worth par plus in the event of bankruptcy," the hedge fund manager noted.

The company has a Byzantine capital structure with some $17 billion in debt set to mature at the holding company over the next few years. Its debt-load includes $5.6 billion of senior unsecured bonds and some $12 billion that holds priority, in bankruptcy, over its senior unsecured bonds, including $642 million of first lien notes and $3.7 billion of second lien notes.

Kim Noland, director of high-yield research at Gimme Credit, estimates the recovery on the second-lien debt could be between 60 cents and par if Calpine files. She said the recovery value on the unsecured notes is harder to estimate because it is unclear which assets would belong to the secured debtholders. She added that the company will likely require a debtor-in-possession loan if it files for Chapter 11. This would have priority over all other debt and could lessen recovery for other creditors.

Others held out little hope for recovery on the unsecured bonds. "The unsecureds will get zero," said one analyst at Boston-based distressed debt investment firm. He estimates the second-lien debtholders would recover 50-70 cents on the dollar. He added that recoveries in a bankruptcy would be complicated because of the large number of creditors. "It would be a food fight of epic proportions," he said.

Some watchers speculated that investors might be aiming to buy up Calpine's debt with a view toward taking claim of the more than 100 generation facilities that back some of the debt. Calpine has $2.4 billion of debt, known as CalGen, tied to some 8.1 GW in plants trading in three liens at or near par, said one hedge fund trader. Holders of third lien paper, the least likely to see much cash recovery, might have an outside shot at taking claim to the plants, he speculates. The IPP also has two liens of outstanding bonds known as CCFC totaling roughly $800 million.

Calpine's 8.625% '10 and 8.5% '11 bonds both tumbled 10 points to trade at 24 3/4 and 25, respectively. The company's second-lien debt fell a couple of points to 74 3/4 and then rebounded to the 75-77 range. Its term "B" loan stayed stable trading in the 100-101 range.

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