Calpine Corporation: Alarming Risk, Potential Reward

I have had a couple of readers ask for some thoughts on Calpine Corporation (CPNLQ.PK) in the last few weeks. This is a very tricky investment and bankruptcy is definitely outside the scope of my investing experience, so I am only going to provide some very brief thoughts as to how I see the potential here.

I am no bankruptcy expert, but in view of what happened to Delta (DALRQ.PK) shareholders during Chapter 11, any bankruptcy investor has to be mindful that their shares can essentially just be wiped off the map by legal action. This is a very dangerous scenario and very difficult to predict, so therefore, an equity investment in Calpine is a very risky proposition.

However, the potential reward, should shareholders keep their equity here, is huge. Calpine is probably a four or five bagger if the share structure remains intact when they emerge from bankruptcy.

Given the huge risks of being a shareholder, the obvious safer play here is to explore the convertible bond market for Calpine. This allows you some of potential upside in Calpine, while at the same time providing protection in the case that shareholder equity is completely wiped out. I have looked at the fixed income offerings for Calpine, and there are a number of convertible bonds at various different yields and conversion prices.

However, at the moment, I do not know what the prices are for Calpine’s convertible debt, so I cannot say whether the bonds are selling at a reasonable price relative to the conversion potential. The trade is certainly compelling, but requires a bit more sophistication than a simple equity trade. Therefore, I would highly recommend that investors who are taking a look at the convertible debt speak to a specialist debt broker for further advice and information. I am going to continue to research and try to follow up on the story.

Alternatively, the other option is to buy a very small amount of Calpine stock with the express knowledge that you could potentially lose your entire investment. This requires both a high risk tolerance and a very small allocation as a percentage of the portfolio. Because of the potential for loss in this route, I personally prefer the convertible bond to equity here, but I still need to do more research before committing any capital.

CPNLQ.PK 1-yr chart

Comments

[rhodope]

Eagerly awaiting your analysis...