Hedge funds were reportedly the biggest buyers of Calpine Corp.'s second-lien debt after the power company filed for bankruptcy last week. Its second-lien loan climbed three points to 80 after the filing. "People who didn't want to play in [the bank debt] before now want to get involved," said a trader. She added that investors are attracted to the debt because of the certainty the bankruptcy filing has brought to the distribution of Calpine's assets.
Calpine's $2 billion debtor-in-possession loan is thought to be a big negative for the unsecured debt holders, which could face lower recoveries than previously thought because of the large size of the loan. First-lien debt holders are unlikely to see their recoveries reduced, however. Chris Roberts, head of research at Tejas Securities, said this class of debt is overcollateralized. "The value of the security exceeds its face amount," he said. The first-lien debt traded steadily in the 101-101 3/4 range.
Roberts added that Calpine has a large amount of uneconomical power contracts that it can reject in a bankruptcy court. These would be classified as unsecured claims and would be pari passu with the company's bonds. Roberts said the Federal Energy Regulatory Commission would likely try to prevent Calpine from rejecting the contracts in bankruptcy court. But he added that it is unclear what the bankruptcy court would decide because there is little precedence in court on this issue.