(Reuters) - Chesapeake Energy Corp increased a planned loan even as its credit rating deteriorated on Tuesday, adding pressure on the natural gas producer to deliver crucial asset sales.
The company, which has sought to soothe investors angered by recent disclosures about its chief executive's potential conflicts of interest, boosted a planned $3 billion bridge loan to $4 billion. There was strong demand for the junk-rated debt that it needs to cover a cash shortfall brought on by the weakest natural gas prices in a decade.
Shares in Chesapeake slumped fell 5.6 percent to their lowest level in more than three years on Tuesday, hurt by news that Standard & Poor's had cut the company's credit rating another notch into non-investment, or junk, status to 'BB-'.
Still, debt investors appeared eager to snap up the chance to buy into the company's newest high-yield debt offering, with commitments for the loan offered by Goldman Sachs and Jefferies Group believed to have reached about $12 billion, more than three times the planned increase.
"If you are investing in Chesapeake right now, you are investing because you think the assets are worth more than the market value of the outstanding debt and equity of the company," said Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which owns Chesapeake debt and holds $172 billion in assets under management.
"These are now asset plays, not a quarter-by-quarter earnings play."
Chesapeake, the nation's second largest gas producer behind Exxon Mobil and for years one the most active gas drillers, faces a 2012 funding shortfall of $9 billion to $10 billion as natural gas prices are the lowest in a decade.
Ratings agency Standard & Poor's said it had cut Chesapeake's credit rating to "BB-" from "BB," citing shortcomings in the company's corporate governance practices, concerns about loan covenants and the likelihood of a wider gap between operating cash flow and capital expenditures.
Chesapeake replaced $4 billion in existing debt with the new $4 billion that comes at a steep 8.5 percent interest rate, and rises to more than 11 percent if the company does not pay it off by the end of the year.
"Chesapeake is forced to issue debt at higher levels than ever with incredibly onerous terms in an interest rate environment that's the lowest most of us have ever seen in our lifetimes?" asked Bonnie Baha, portfolio manager at DoubleLine, which oversees $34 billion in assets under management. "It's absolutely untenable."
The company said that after fees and syndication costs, it received $3.8 billion, bringing its liquidity to over $4.7 billion in cash and borrowing capacity.
Even with the new loan, Chesapeake faces rising pressure to cut costs, which could come in the form of business unit reductions or layoffs. The company has gained a reputation for generous treatment of its employees so layoffs would highlight a significant shift in the company's employee base. It currently employs 12,600.
The company has already begun to reduce its use of third-party land brokers, striking at the heart of Chesapeake's vaunted army of land scouts famous for identifying acreage rich in reserves and then locking down leases.
On Monday, Chesapeake said it had cut the number of brokers to 1,300, or about 62 percent, from a peak of 3,400. The company plans to cut further and expects the broker number to be 650 by year end.
Chesapeake has said it planned to bring in $9 billion to $11.5 billion this year from sales of assets. First among those is its holdings in West Texas' Permian Basin, one of the most prolific U.S. energy regions, which could fetch up to $7 billion, according analysts from Canaccord Genuity.
That puts the pressure on Chesapeake's dealmakers, who have previously signed joint ventures with industry heavyweights such as France's Total SA, Norway's Statoil and China's CNOOC.
Reuters reported last month that CEO Aubrey McClendon had borrowed at least $1.1 billion against his personal stakes in the company's wells from lenders who also had dealings with Chesapeake, a deal that analysts and academics said raises possible conflicts of interest.
McClendon also ran a $200 million hedge fund that traded in the same commodity, natural gas, that the Oklahoma City-based company did, Reuters reported.
SunTrust Robinson Humphrey analyst Neal Dingmann said he was encouraged by the increase in the loan size, which he believes will give Chesapeake more flexibility in the asset sales.
"A company that is running out of financial options and everybody knows they need to do some deals, the closer they get to that point the more nervous everybody is going to get," Dingmann said. "Hopefully this is going to abate some of those fears. You've basically just taken the cash up front."
Chesapeake's lenders on the bridge loan, Goldman and Jefferies, are also advisors on the Permian asset sale, a move that signals confidence that the deal will close.
The cost to insure the company's debt against potential default fell on the loan news.
Five-year credit default swaps tightened by 13.5 basis points to 770 basis points on Tuesday. That means it costs $770,000 a year for five years to insure $10 million of debt, according to data from Markit Group.
Shares of Chesapeake closed down 5.6 percent at $14.65 on the New York Stock Exchange on Tuesday, the lowest closing price since March 2009.
Reporting by Jennifer and Smita Madhur in New York; Additional reporting by Carrick Mollenkamp, Matt Daily, Billy Cheung and Ciara Linnane in New York and Anna Driver and Mike Erman in Houston.; Writing by Matt Daily; Editing by David Gregorio, Bob Burgdorfer and Tim Dobbyn