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Calpine Rating Surprise Throws Investors For A Loop

High-yield investors are asking questions in the wake of a Standard & Poor's rating on the recent Calpine Generating Co. bond offering, which came in lower than expected.

High-yield investors are asking questions in the wake of a Standard & Poor's rating on the recent Calpine Generating Co. bond offering, which came in lower than expected. The rating agency last week assigned a triple-C plus rating to part of Calpine's recent $2.4 billion multi-tranche offering, a notch below the single-B minus level investors say Morgan Stanley intimated during the pre-sale process. The fixed-rate, 11.5% notes dropped at least seven points last week, partly because the rating on the floating-rate, third-lien notes turned out to be different from the level at which they were marketed.

Peter Rigby, director of utilities, energy and project finance at S&P, says it never issues implied ratings and any implication to investors came from either Morgan Stanley or Calpine. "They priced a deal and sold it before the rating came out," he says. "Based on the number of phone calls I've received, yes, people were surprised."

Despite concerns that it did not place all of the bonds and was forced to retain a portion of them, Mark Lake, spokesman for Morgan Stanley, says the deal had more than 200 investors. He declined to comment on the S&P rating. Treasury officials at Calpine in San Jose, Calif., did not return calls by press time.

One portfolio manager, who did not participate in the deal, says the final rating caught him by surprise and notes that most investors thought the rating was lined up before the deal was priced. Investors agree that while credit ratings shown during the marketing process are only tentative, final levels rarely vary and buyers say they make decisions in part based on the expected ratings.

Kim Noland, analyst at GimmeCredit, notes that the revised rating pressured accounts that had to unload the bonds because at triple-C the securities are of a predominantly speculative nature and are considered much riskier.

The ratings confusion is the latest blemish on this financing. Deutsche Bank initially had the mandate but pulled a planned $2.3 billion sale earlier this year after it could not find buyers at attractive levels. Morgan Stanley later picked up the mandate.

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