Calpine's Quick Fix a Bandage, Not a Cure

Calpine(CPN Quote) 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. ...