Legal woes no drag on new Chesapeake bond deal

Thu Mar 21, 2013 12:42pm EDT

March 21 (IFR) - Chesapeake Energy attracted plenty of demand for its new debt offering this week, as investors shrugged off the company's dispute with current bondholders playing out in a New York courtroom.

The embattled natural gas giant, which is also under investigation by the Department of Justice and the Securities and Exchange Commission, had no trouble selling its US$2.3bn bonds, which priced on Monday.

Part of the proceeds will be used to redeem Chesapeake's 6.675% 2019s that are at the heart of a legal battle with Bank of New York Mellon, the trustee, and a small group of investors.

Despite the turmoil surrounding the Oklahoma-headquartered company, however, investors flocked to the new deal, with all tranches well over-subscribed in an order book that was heard to include a who's who of the high-yield market.

Even the 10-year notes, long in a market that has investors looking to limit duration risk, were snapped up without a hitch.

The strong demand demonstrated that Chesapeake, the second-largest natural gas producer in the United States, remains an attractive high-yield credit benefiting from strong assets and rising natural gas prices.

NOT THE SAME BUYERS

It was heard that the investors battling it out with Chesapeake over the 2019s did not take part in the new offering.

"They didn't play those 2019 notes because they are long-term investors, they played them because they thought there was a loophole," said one market source.

The disputed 2019s have an unusual call structure, including a four-month window that ended March 15 during which they could be called at par.

BNY Mellon and the investors argue that the company did not abide by the timetable for their redemption at par, and that Chesapeake should have to pay a make-whole provision on the bonds, which are currently trading at 104.

The company says that could cost an additional US$400m.

"My view is that clearly the lawyers who wrote up Chesapeake did a very poor job of writing the indentures and agreements," said another investor. "And smart hedge funds tried to take advantage of that."

The case is set to go to trial on April 23. Nevertheless, Chesapeake has said it expects to win - and went ahead with the new issue on Monday in part to redeem the 2019s.

If the court ultimately rules in favor of the bondholders, then Chesapeake said it will use the proceeds of the new deal to refinance other debt.

ATTRACTIVE DEAL

Chesapeake certainly has plenty of other outstanding debt to pay down in the years ahead. It has roughly US$2bn of prepayable term loans, a revolver that was partially drawn down, and several other maturities of bonds.

In addition to redeeming the 2019s, this week's new deal will 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.

Chesapeake has typically come to the high-yield market with bullet notes that are non-callable for life. This time, though, leads Morgan Stanley, Credit Suisse, Citi, Goldman Sachs and Wells Fargo looked to create a more flexible call structure.

That will ultimately allow for better optionality over the next year or two to pay down debt that won't require a make-whole call at T+50bp.

The shortest of the three tranches was a three year non-call one, which is one of only a handful of such maturity structures in the market. The tranche was sized at US$500m and priced at 3.25% at par, in line with talk.

Another US$700m was raised in eight-year non-call three senior notes, which priced at 5.375% at par.

The longer 10-year non-call one tranche, sized at US$1.1bn, priced at 5.75% at par.

All three notes, rated Ba3/BB-, were sold in line with price guidance and traded up in the aftermarket. On Tuesday, the day after pricing, the three-year issue was quoted at 101, the eight-year was up at 100.50 and the 10-year traded at 101.25.

In terms of comps, leads used the company's own capital structure. For the three-year, they looked to Chesapeake's existing two-year and four-year bullet notes.

Demand allowed the underwriters to push down pricing so that the three-year tranche was priced right in the middle of the existing comps, despite the unusual non-call one structure.

The eight-year notes priced at a slight (17bp) premium to the existing 6.125% bullets due 2021, which traded around 5.21%, to take into account the call structure.

The 10-years priced at a spread to the new eight-years, which in this case was roughly 3/8 of a point. Compared to the existing eight-years, the spread was closer to 55bp. This is in line with - and slightly tighter than - where other recent 10-year notes have priced.

Chesapeake has come under increasing regulatory scrutiny after Reuters last year wrote a series of stories outlining CEO Aubrey McClendon's complex financial relationship with the company.

The SEC and the company's management board are looking into undisclosed personal loans McClendon received from a major shareholder.

Reuters also reported that Chesapeake and rival Encana Corp discussed measures to avoid bidding against each other for land they hoped to acquire in Michigan, prompting a Justice Department investigation. McClendon has since stepped down as chairman, and his tenure as CEO ends April 1.

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