UPDATE 2-RLPC: Chesapeake increases bridge loan to $4B vs $3B

Tue May 15, 2012 12:42pm EDT

By Smita Madhur

NEW YORK, May 15 (RLPC) - Loan investors are awaiting the fate of Chesapeake Energy Corp's recently increased $4 billion bridge loan once its frees to trade in the secondary loan market, sources told Thomson Reuters LPC.

Today, the issuer increased the bridge loan from an initial size of $3 billion and also tightened the discount at which it is offering to price the loan to 97 cents on the dollar from initial guidance of 96 cents on the dollar.

The loan is believed to have drawn commitments of around $12 billion, mainly from high yield bond accounts and hedge funds which are attracted to the juicy yield- north of 8.5 percent- that Chesapeake is offering.

Demand for the loan comes amid widely perceived credit risks and a funding shortfall that led the company to seek this 'last ditch financing,' sources said.

The loan, which is led by Goldman Sachs and Jefferies, is guided at a rate of 700bp over Libor with a 1.5 percent Libor floor.

"It's great for the company that the capital markets are in the shape they are in and that investors are getting paid handsomely at Libor plus 700," said an investor looking at the deal. "But when it frees to trade and runs up to par, where will this loan end up living? Who will buy it when it hits par?"

The loan's issue price of 97 cents on the dollar boosts the yield from its contractual coupon of 700bp over Libor. But many market participants are questioning if the loan will be dumped by investors who have possibly bought it at 97 to cash in on its expected price appreciation.

The speculation is particularly relevant since 'fast money accounts' are said to be focused on the total returns they can extract from buying into the loan.

"There will be a bunch of investors who won't tolerate a ton of spread compression on this loan when it trades up," said a second investor. "I don't know what the demand curve looks like for this asset."

Some potential candidates that could end up holding the loan if it rises quickly are collateralized loan obligations (CLOs) with provisions to hold unsecured loans and large prime funds that could be drawn to the loan's liquidity, according to sources.

MIXED REACTIONS

For the time being, opinions on the loan, as it currently stands, are mixed. Investors who have committed to buy the loan say that they are comforted by the company's intention to pay it down quickly.

During the remainder of the year, Chesapeake plans to complete asset sales totaling $9-11.5 billion and intends to use a portion of the proceeds from these asset sales to repay the bridge loan. If the asset sale does not fully repay the loan, pricing steps up to 800bp over Libor.

Additionally, if the loan is not fully repaid by Jan. 1, 2013, pricing steps to 1,000bp over Libor with a T+50 make-whole provision. The provision benefits investors and creates an incentive to the issuer to pay down the loan beforehand.

Chesapeake has received strong interest from prospective buyers of its Permian Basin asset-sales process and its Mississippi Lime joint venture process and the company expects to complete these two transactions in the third quarter of 2012, the issuer said in a press release earlier.

"There seems to be a private equity bid in general in the space," said a buyside source.

In February, a consortium consisting of Apollo Global Management, Riverstone Holdings, and Access Industries announced plans to acquire El Paso's oil and natural gas exploration business for $7.15 billion.

In addition, KKR acquired Samson, a private oil and gas upstream company, for $7.2 billion in the fourth quarter last year. KKR and Chesapeake also agreed to form a partnership to invest in mineral and royalty interests in oil and gas assets in March.

Moreover, Carl Icahn has been rumored to be seeking to invest in Chesapeake equity after publicly announcing that the stock was "undervalued" in an April 30 CNBC broadcast, Reuters reported Monday, citing media reports.

Loan investors with lower risk appetites have been quick to point out the perceived pitfalls of the loan.

The most notable criticism is that the bridge loan is unsecured and the company will still have liquidity and covenant issues.

"In a bankruptcy, we would be pari passu to at least $9.5 million of senior bonds," said an investor who turned the deal down.

He added that the company's EBITDAX is expected to decline 40 percent this year due to low gas prices and the company's lack of hedging. Meanwhile, total debt is expected to increase from $10.6 billion in 2011 to $21.9 billion in 2012, he said.

"They are still spending aggressively despite the lack of liquidity. In 2012, they plan to spend $12.5 billion in capex compared to $3.2 billion in EBITDA," he added.

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