TEXT - Fitch rates Chesapeake Energy's term loan
Nov 8 - Fitch Ratings has assigned a 'BB-' rating to Chesapeake Energy's $2 billion unsecured term loan due 2017. A full list of ratings appears at the end of this release. The Rating Outlook for Chesapeake remains Negative. Proceeds for the term loan will be used to pay off the remaining balance on the company's existing $4 billion term loan and to reduce borrowings on the company's $4 billion revolver due 2015. The term loan will enhance liquidity and will help to bridge funding needs as the timing of some of the remaining planned 2012 asset divestitures may roll over into early 2013. The ratings on Chesapeake reflect the company's leverage relative to reserves and production, offset somewhat by the sheer size of its asset base and operating profile. For the quarter ended Sept. 30th, Chesapeake's balance sheet debt was over $16 billion compared with approximately $11 billion as of year-end 2011. The company's strategy to transition to more liquids production is underway; however, weak natural gas prices this year have still had a negative impact on financial results. More than three-quarters of the company's current production remains natural gas. The weak price realizations for natural gas combined with aggressive spending in 2012 to accelerate liquids production has resulted in negative free cash flow so far this year of slightly over $10 billion, some of which has been offset by asset sales and monetization to date. For the quarter ended Sept. 30, adjusted debt (which includes preferred equity, non-controlling interests and other Fitch calculations such as future lease operating expenses related to volumetric production payment agreements, etc.) to flowing boe per day was approximately $35,000/boe/d and its adjusted debt/proved developed reserves(PD) was over $12/PD. The Negative Outlook reflects the funding issues the company faces while it transitions to an increased emphasis on liquids production amidst a weak natural gas pricing environment. Negative free cash flow in 2012 is expected to be largely funded by asset sales and monetizations. However, fiscal 2013 may also be significantly free cash flow negative if aggressive spending plans are maintained. Closing of the remaining planned 2012 asset sales in a timely fashion with proceeds used to reduce debt balances combined with a balanced 2013 capital program that does not heavily rely on asset sales/monetizations or debt issuances could result in the Outlook returning to Stable. Remaining planned divestures for 2012/early 2013 may total as much as $6.5 billion which could be used to significantly reduce debt balances relative to current levels. Liquidity is provided by the company's $4 billion secured revolver and expected proceeds from planned asset sales/monetizations. Maturities are relatively light in 2013 with only $464 million due and $1.6 billion due 2015. Chesapeake has a significant amount of debt that can be prepaid in the near term without a call premium. Key covenants are primarily associated with the secured revolver and include maximum debt-to-book capitalization (70% covenant threshold) and maximum total debt-to-EBITDA. The revolving facility was recently amended so that the maximum debt-to-EBITDA is 6X at Sept. 30; 12.5x at Dec. 31; 12.4.75x at March 31, 2013, 4.5x at June 30, 2013, 4.25x at Sept. 30, 2013, and 4x thereafter. Fitch rates Chesapeake as follows: --IDR 'BB-'; --Senior unsecured notes 'BB-'; --Senior secured revolving credit facility 'BBB-'; --Convertible preferred stock 'B''. In addition, Fitch has assigned the following rating: --$2 billion senior unsecured term loan 'BB-'. The Rating Outlook remains Negative. WHAT COULD TRIGGER A RATING ACTION Positive: Future developments that may, individually or collectively, lead to positive rating action include: --Material progress in deleveraging the balance sheet relative to reserves and production; --Much stronger cash flow generation leading to consistent and significant positive free cash flow generation. Negative: Future developments that may, individually or collectively, lead to negative rating action include: --Negative free cash flow leading to rising debt levels relative to reserves and production; --Marked decrease in production levels or proved developed reserves relative to debt.
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