UPDATE 1-Chesapeake plans new debt issue to fund disputed buyback

Mon Mar 18, 2013 2:34pm EDT

By Rachelle Kakouris

NEW YORK, March 18 (IFR) - Chesapeake Energy Corp announced plans Monday to market US$2.3 billion of new debt to investors, in part to finance the controversial buyback of some existing bonds that are at the heart of a court dispute with the company's current bondholders.

Just days after partially losing a legal challenge to force Bank of New York Mellon to accept the buyback plan, the second-largest US natural gas company said it would issue new senior notes, the proceeds of which would be partly used to pay for the redemptions.

Chesapeake, which is under investigation by the Securities and Exchange Commission (SEC) and the US Department of Justice over different matters, said the proceeds of the SEC-registered Ba3/BB- rated deal would redeem the US$1.3bn of its 6.775% 2019 notes that are at the heart of the legal battle.

The company has taken a decidedly aggressive tone with bondholders, announcing on Friday that it planned to go ahead with the redemption just a day after failing to convince a US district court judge to force BNY Mellon, trustee for the bonds in question, to fully accede to its terms.

The bank and other investors said Chesapeake essentially did not keep to the timetable laid out in the bonds for their redemption, and that the company should have to make an additional so-called "make-whole" payment that Chesapeake has said could cost an additional $400 million.

But the court ruled in Chesapeake's favor on the make-whole question and said it would not be forced to call the bonds at the higher price if the court later rules that proper notice was not given.

The company said in a statement Friday that it was "overwhelmingly" likely to win the court fight, and thus was going ahead with plans to redeem the notes at 100 cents on the dollar, or par.

NEW BONDS

The new notes would be in three tranches with maturities of 2016, 2021 and 2023, marketed via active bookrunners Morgan Stanley and Credit Suisse, and passive joint bookrunners Citi, Goldman Sachs and Wells Fargo.

Price talk is around analyst expectations, with the shorter dated three-year non-call one tranche touted around 3.25% to 3.5%, the eight-year non-call three at 5.375% and the 10-year bullet note at 5.75% area.

In addition to the contested redemption, proceeds would be used to fund a tender offer for any and all of its US$464.1m 7.625% senior notes due 2013 and its US$473.7m 6.875% senior notes due 2018.

Like many companies in the current climate, Chesapeake seems to be aiming at redeeming outstanding debt - issued at a more expensive coupon or interest rate during less issue-friendly conditions - by issuing new cheaper debt in the current low interest-rate environment.

The 2019 notes under dispute have an unusual call (or redemption) structure including a four-month window during which they could be called at par. BNY Mellon and other holders of the notes argue that Chesapeake did not keep to the advance notification restrictions for the redemption.

According to a Reuters report last week, a New York court refused to grant a preliminary injunction authorising the redemption at 100. But it said that if the company did issue an early notice to call the bonds at par, and the court later found that the notice was given too late, then the notice would be null and void, and Chesapeake would not be obliged to call the bonds at the make-whole price.

The notes were trading at around 104.75 mid-morning on Monday.

If Chesapeake loses the case, the company plans to use the remaining funds to redeem other debt and reduce borrowings on its revolving credit facility.

"In our view, should Chesapeake receive an unfavorable ruling on its declaratory judgment claim, the remaining cash would likely provide the company with flexibility regarding its asset sale program," said Ken Duffel, vice president and analyst at KDP Investment Advisors.

Separately, the SEC is probing a perk that granted Chesapeake's departing CEO Aubrey McClendon a stake in the company's wells. Meanwhile the Justice Department is looking into possible antitrust violations over land deals in Michigan.