Calpine's Quick Fix a Bandage, Not a Cure

Calpine(CPN) announced this morning that it completed a $150 million private placement of preferred securities with a six-month maturity, and at a rate 950 basis points above the London Interbank Offering Rate (LIBOR), which is about 13.5%. Shares are up 8 cents to $3.09.

The timing of this deal is rather interesting, as it comes on the same day as the company's $186 million debt maturity, and appears to be a sign of an urgent need for cash. Why else would a company complete a six-month deal at a rate 950 basis points above a benchmark short-term lending rate? Similar deals from companies with better credit ratings would be done at much better terms, say, a few percentage points over LIBOR, at most, for such a short maturity.

The good news is that the company bought itself some time and some sorely needed working capital. The bad news is that this deal is not evidence of an improved financial situation. In fact, this new debt may worsen Calpine's financial strength over the long term.

Calpine said in its press release that this preferred sale "represents another milestone in Calpine's strategic program aimed at reducing debt by the end of 2005." While this is true -- it does help the company reduce the debt it was already required to pay down, and that Calpine had disclosed it would -- it now creates an additional $150 million in liability due in 2006, adds to the company's interest expense, and simply pushes out a maturity into the weakest part of Calpine's operations.

The potential for a deal like this was one possibility for Calpine to buoy itself temporarily when I first wrote negatively on the company last week. But this news in no way changes any part of my thesis that Calpine will soon face a cash crunch that will force it to liquidate its EBITDA-generating power plants. I continue to believe equity investors should avoid Calpine's shares at all costs.