Calpine's bonds traded up seven points across the board after the company sold $300 million of preferred stock to buy back bonds. The bonds made a strong rebound after falling 12 points last week when the $300 million of financing looked like it might get pulled. Calpine's second-lien bank debt also traded up four points to 78.
But the large amount of debt Calpine is harboring has analysts concerned it will soon file for bankruptcy. An analyst at a distressed debt investment firm said an energy company's debt to EBIDTA should be six times for it to be a solid credit. He estimates Calpine's debt to EBIDTA is 20 times.
Calpine has sold assets to reduce its debt. But the analyst said this has also reduced its ability to service debt because its EBIDTA has also been reduced. The analyst estimated that the company is likely to file by 2007, if not sooner. Calpine had $600 million of cash by the end of the second quarter of 2005, which he believes the company will burn through by the end of the year. "If they make it to 2007, the company then has massive maturities to deal with. Unless there is a rebound in the power markets, they can't refinance that debt," he said. A Calpine spokeswoman said the company has no plans to file for bankruptcy and that it is working to reduce its debt.
Large energy companies, such as Mirant, have seen the value of their unsecured debt soar on the expectation that the energy sector will perform well as it rapidly consolidates. The large price tag of the NRG/Texas Genco acquisition signaled the upswing in the value that investors are willing to pay for power firms. But the analyst believes Calpine's unsecured creditors will not make the same kind of profit that Mirant's unsecured note holders could make. "I would be astonished if the unsecured bondholders get the same back as Mirant. Calpine's earnings would have to double for the bondholders to get a recovery on their investments," he said.
If Calpine files, the value of its assets may be worth little to the unsecured note holders. "It is not clear how much residual value would end up at the holding company where the second lien and bondholders are. The unsecured bondholders will likely get zero. The second lien may get 10 cents on the dollar," he said.