4/17/2018 Demand for Calpine Debt Spurs Increase in Size of Bond Sale - WSJ

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TREASURYS

Demand for Calpine Debt Spurs Increase in
Size of Bond Sale
By Tom Barkley and Simona Covel Dow Jones Newswires
Updated July 9, 2003 10 15 p.m. ET

NEW YORK -- Calpine Corp. could become the latest troubled energy company to find a warm
welcome in the junk-bond market Thursday when it sells at least $2 billion in bonds.

Ample demand for the formerly investment-grade company's debt enabled underwriter
Goldman Sachs to increase the size of the bond sale from $1.2 billion, according to people
familiar with the private transaction.

Indicated terms weren't affected by the increase in the size of the transaction, which is
expected to include about $1 billion in seven-year notes yielding 8.25% to 8.5% and $1 billion in
10-year notes yielding 8.5% to 8.75%.

The transaction also includes $1 billion divided between four-year floating-rate notes and term
debt, both expected to yield 5.75 percentage points over the London interbank offered rate.

Strong demand for junk bonds has let several energy companies that are engineering
turnarounds, including AES Corp. AES 1.47% ▲ and El Paso Corp. , to sell big bond deals. As with
AES, an attraction of Calpine's deal is its backing.

Collateral exceeds the debt by many times, said Brian Hessel, managing partner at Stonegate
Capital Management, New York, which holds Calpine bonds among $300 million of high-yield
assets. "Even in the most Draconian scenario, it's a very attractive [deal] because of the
security and where Treasurys are trading," he said.

The second-priority notes and term loan will be secured by substantially all assets owned
directly by Calpine. That totals about $4.1 billion in natural-gas and power-generation assets
and about $4.2 billion of equity value associated with power contracts, estimated Greg
Imbruce, high-yield energy analyst at Jefferies & Co.

Chris Towle, a partner at Lord Abbett & Co. in Jersey City, N.J., said the yield of the notes was
"probably a bit of a shock." Mr. Towle, who owns Calpine bonds among the $8 billion in bonds
he manages, said that with the collateral, "it's probably right, but it strikes me as being on the
low yield side, given the difficulties in the industry."

Calpine's bonds have been surging since the refinancing plan was unveiled late last month. Its
8.5% notes due 2011 have gained 12 cents since the announcement and Wednesday were up 0.5
cent at 83.5 cents on the dollar.

Calpine officials weren't available to comment.

Calpine plans to use proceeds from the deal to pay down debt, including about $950 million in
term loans and $450 million under its working-capital revolvers. Additional proceeds are
earmarked for buying back debt in the open market, including its convertibles. About $1.2

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4/17/2018 Demand for Calpine Debt Spurs Increase in Size of Bond Sale - WSJ
billion of Calpine's 4% convertible notes due 2006 can be put, or sold back, to the company at
par in December 2004, and that is viewed as a big hurdle facing the company.

Calpine ended its first quarter with about $400 million in unrestricted cash. After the $3 billion
second-priority deal, and factoring in planned construction spending for the year, it should end
the year with about $2.2 billion in cash, said Mr. Imbruce of Jefferies.

Calpine has also continued to build power plants at a time when most others in the sector are
deleveraging. That has added to concerns about its credit quality.

In June, Standard & Poor's cut the company's senior-unsecured debt three notches to a highly
speculative triple-C-plus rating, citing increased business risk "as it continues to build new
power plants and shift its portfolio toward the more volatile merchant-power sales."

Moody's Investors Service put its single-B1 senior-unsecured rating on review for possible
downgrade in June, saying debt will rise to pay for committed projects.

Treasurys
Treasurys gained modestly on bargain-hunting and a better-than-expected sale of Treasury
Inflation Protected Securities, or TIPS. But prices are expected to move little in the next few
days as investors wait to hear what Fed Chairman Alan Greenspan has to say next week about
the economy.

At 4 p.m., the benchmark 10-year note was up 8/32 point, or $2.50 per $1,000 face value, at 99
14/32. Its yield fell to 3.694% from 3.726% Tuesday, as yields move inversely to prices. The 30-
year bond's price was up 9/32 point at 110 10/32 to yield 4.704%, down from 4.72% Tuesday.

The Treasury auctioned $11 billion in TIPS. Some dealers had expected lackluster interest
because of the auction's large size and a weak performance recently by both TIPS and
conventional Treasurys. The bid-to-cover ratio, a measure of demand, came in at 2.18, slightly
below the 2.22 level in the previous auction in January. The auction yield, at 1.999%, was well
below the 2.05% level seen just before the bidding deadline.

—Joy C. Shaw and Michael MacKenzie contributed to this article.

Write to Tom Barkley at

OTHER RESOURCES tom.barkley@dowjones.com and Simona Covel at
Major Bond Indexes: See statistics on simona.covel@dowjones.com
indexes tracking Treasurys, U.S.
corporate-debt issues, mortgage-backed
securities and more, updated at the end
of the most recent session.

See real-time commentary covering

releases, events and flows affecting the
Treasury market, from Briefing.com.

AUCTION RESULTS

Here are results of Wednesday's Treasury auction of 10-year inflation indexed notes: All
bids are awarded at a single price at the market-clearing yield. Rates are determined by the
difference between that price and the face value.

Applications $24,012,823,000
Accepted bids $11,000,001,000
Bids at market­clearing yield accepted 85.08%
Accepted noncompetitively $439,871,000
" foreign noncompetitively $0
Auction price (Rate) 98.881 (1.999%)
Interest rate 1.875%
Cusip number 912828BD1
The notes are dated July 15, 2003, and mature July 15, 2013.

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