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
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.
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
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
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.