* Noteholders say redemption would shortchange them
* Chesapeake seeks rights as to 6.775 pct notes due 2019
* Trustee Bank of NY Mellon also opposes Chesapeake
* Price of notes rises further above face value
By Bernard Vaughan and Jonathan Stempel
NEW YORK, March 12 Chesapeake Energy Corp
is facing a showdown with investors and a bond trustee
over its plan to redeem $1.3 billion of notes early.
The natural gas company, which faces a projected $3 billion
cash shortfall this year, is hoping to avoid an extra $400
million of payments on the notes, which carry a 6.775 percent
interest rate and mature in 2019.
Chesapeake filed a lawsuit last Friday in U.S. District
Court in Manhattan seeking to block bond trustee Bank of New
York Mellon Corp from interfering with the proposed
redemption of the debt at 100 cents on the dollar, or par.
But in a court filing on Tuesday, investors who own roughly
$250 million of the notes contended that the plan would
shortchange them, saying the notes are worth more and that the
move would violate Chesapeake's contractual obligations.
Bank of New York Mellon also filed court papers opposing the
Jim Gipson, a Chesapeake spokesman, declined to comment.
Chesapeake believes it has the right to issue a notice of
redemption by March 15 to avoid the extra $400 million payment,
while the noteholders and Bank of New York Mellon believe that
the actual redemption needs to take place by then.
At a hearing on Tuesday evening, U.S. District Judge Paul
Engelmayer in Manhattan said he would rule on the issue from the
bench on Thursday at 3 p.m. EDT (1900 GMT).
Steven Bierman, an attorney for the noteholders, told
Engelmayer that Chesapeake was a sophisticated borrower that was
trying to rewrite the rules on redeeming the $1.3 billion in
"There is no ambiguity here," Bierman said. "A deal is a
But Engelmayer voiced skepticism with arguments against
Chesapeake, saying at one point that, "It looks to me as if
(Bank of New York Mellon) and the noteholders are trying to get
unjustly rich" from the $400 million payout.
Bank of New York Mellon, as trustee of the notes, "has no
horse in this race," Paul Weinstein, an attorney for the bank
said. But he said the contract is clear that Chesapeake would
have to pay the $400 million if it sought to redeem the notes
after March 15.
"The indenture says it, the supplemental prospectus says
it," Weinstein said.
Chesapeake has said the proposed redemption is part of a
broader plan to refinance its debt. A higher payout would hurt
its balance sheet.
Chesapeake will not issue a notice of redemption to
noteholders if Engelmayer rules that doing so would not protect
it from the $400 million payout, Richard Ziegler, an attorney
for the company, said at the hearing on Tuesday.
The 6.775 percent notes traded up 3.1 cents at 106.1 cents
on the dollar in morning trading, with a yield of 5.57 percent,
according to bond pricing service Trace.
Chesapeake shares closed up 3 cents at $21.49 on the New
York Stock Exchange.
The dispute is separate from a U.S. Securities and Exchange
Commission probe over a perk that granted Chesapeake's departing
chief executive, Aubrey McClendon, a stake in company wells.
In addition, the U.S. Department of Justice is examining
possible antitrust violations over Chesapeake land transactions
BALANCE OF HARDSHIPS
Chesapeake is seeking a court order giving it until March 15
to provide investors with notice of its note redemption rights,
and a preliminary injunction to block Bank of New York Mellon
The noteholders, who were not earlier part of the lawsuit,
sought to intervene, saying Chesapeake showed an "utter failure
to demonstrate any irreparable harm, likelihood of success on
its claims, or that the balance of hardships on its motion tip
decidedly in Chesapeake's favor."
In a separate court filing, James Seery, who said he is a
partner at noteholder River Birch Capital LLC, said that under
the contract, the redemption price should now be about 129 cents
on the dollar, not 100 cents.
If Chesapeake prevails, even temporarily, "River Birch and
the other note holders will suffer material monetary damages,"
Bank of New York Mellon called the injunction request
premature and likely to fail on the merits.
"Chesapeake, having missed the deadline to redeem the notes
at par, now demands an advisory opinion from the court, seeking
to guarantee the idiosyncratic treatment of a future redemption
notice which has not been made," the bank said in its court
papers. "Chesapeake has suffered no injury and lacks standing."
The case is Chesapeake Energy Corp. v. Bank of New York
Mellon Trust Co NA, U.S. District Court, Southern District of
New York, No. 13-01582.