Calpine Unshackles Assets From Bonds: Corporate Finance

Calpine Corp. sold unsecured debt for the first time since the power producer exited bankruptcy protection in 2008 as it pivots toward a capital structure that erodes the control of creditors on its actions.

The company sold $2.8 billion of bonds maturing in 2023 and 2025. It will use the money to refinance debt at lower interest rates, retiring notes that are secured by power plants and eliminating restrictive covenants that may limit its ability to buy or sell assets.

By freeing its bonds from onerous conditions and some assets from its debt, Calpine is increasing its ability to pursue deals or boost shareholder returns without seeking permission from lenders. Calpine improved its standing with creditors by reducing its ratio of debt to earnings before interest, taxes, depreciation and amortization to 6.8 times from 8.9 times a year ago, according to data compiled by Bloomberg.

“They came out of bankruptcy at a terrible time, when the secured debt market offered much better terms,” Andy DeVries, an analyst at research firm CreditSights Inc., said in a telephone interview. “They are now taking advantage of the wide-open credit markets. Calpine is essentially losing all significant covenants and that would allow them in the long term to do more asset sales, juice up buybacks or pursue M&A deals.”

Investor Demand

Brett Kerr, a spokesman for Calpine, said he couldn’t immediately comment on the company’s bond offering.

High-yield, high-risk borrowers such as Calpine are increasingly able to dictate terms to lenders as the Federal Reserve’s six-year policy of near-zero short-term interest rates has investors eager to own debt with higher returns. A measure of the strength of junk-bond covenants that are written into offering terms to protect buyers is about the weakest since Moody’s Investors Service started tracking the data in 2011.

Calpine sold $1.25 billion of notes due January 2023 to yield 5.375 percent and $1.55 billion of January 2025 bonds yielding 5.75 percent, Bloomberg data show. The debt is rated B by Standard & Poor’s.

The new Calpine bonds lack all the “normal high yield covenants,” according to a report from independent credit-research firm Covenant Review LLC. A liens covenant has a “massive loophole that is completely inappropriate for long-dated bonds and could allow for tremendous structural and lien subordination for mergers and acquisitions, future discounted exchange offers, or any other purpose,” according to the report.

The power producer is seeking to buy back some or all of its $320 million of 8 percent bonds maturing in August 2019, according to a statement yesterday.

Consent Solicitations

It’s also offering to repurchase the $880 million of 7.875 percent debentures due July 2020 for as much as 110.5 cents on the dollar and $1.6 billion of 7.5 percent notes due February 2021 are being repurchased at 111.4 cents, according to a second statement. Investors who tender to those offers have to agree to release the security backing their bonds and abandon restrictive covenants.

The 2020 notes traded at 108.63 cents on the dollar to yield 6.1 percent on July 7, before the consent solicitation was announced, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority. The 2021 securities traded at 108.75 to yield 5.88 percent.

Moody’s upgraded the company’s debt outlook to “positive” and raised the senior secured debt rating to Ba3 from B1, according to a report yesterday.

‘Additional Flexibility’

The increase “reflects the introduction of a significant amount of unsecured debt into the capital structure,” Moody’s analyst Toby Shea wrote in the report.

“It gives them additional flexibility in terms of being able to buy and sell assets,” Shea said in a telephone interview. “With secured debt, there are more onerous covenants they have to work with.”

High-yield, high-risk, or junk, bonds are rated below Baa3 at Moody’s and BBB- by S&P.

Calpine is recovering from a $190 million loss in 2011 as rising power prices, new contracts and increasing reliability of its cleaner-burning power plants lift its income. The company earned $14 million in 2013 and is forecast to post net income of $438.8 million this year and $367.5 million in 2015, according to four analysts surveyed by Bloomberg.

New Fleet

The company has benefited from a rise in gas prices from a 10-year low because its fleet is newer and more efficient and therefore needs to burn less of the fuel than some competitors. In addition, utilities are using more gas generation as coal plants are shut to comply with environmental rules.

Shares of the power producer, which were below $5 in 2009, traded at $23.57 at 10:17 a.m. in New York, up 21 percent this year.

Calpine said in April it would sell six power plants in the U.S. Southeast to LS Power for $1.57 billion to focus on competitive markets such as Texas and the Northeast.

The company, founded in 1984, was created to compete for electricity sales with former local utility monopolies as the U.S. power business was deregulated. It suffered after the 2001 collapse of Enron Corp. and a glut of new plants caused power prices to fall, leading it to file for bankruptcy in 2005. It emerged from protection in 2008.

Gas-Fired Plants

Calpine, the largest independent owner of natural-gas burning power plants, stands to benefit from efforts by the Obama administration to reduce carbon-dioxide emissions, UBS AG said in a June 16 research note.

The U.S. Environmental Protection Agency proposed rules last month that would require the nation’s power generators to reduce greenhouse-gas emissions by an average of 30 percent from 2005 levels by 2030. The proposal would encourage higher use of natural gas generators such as those owned by Calpine, since gas plants release about half the amount of carbon as coal units, UBS said in its note.

Calpine owns about 26,000 megawatts of power production capacity, according to the company’s website.

The company’s leverage, or ratio of debt to Ebitda, compares with 6.5 times for NRG Energy Inc. and 7.8 times for Dynegy Inc., according to data compiled by Bloomberg.

The latest offering will “transition the company from a historically secured-basis bond issuer to an unsecured one,” DeVries said.

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