| NEW YORK
NEW YORK Chesapeake Energy Corp (CHK.N) 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 (BK.N) 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 redemption plan.
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.
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 notes.
"There is no ambiguity here," Bierman said. "A deal is a deal."
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 in Michigan.
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 from interfering.
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," Seery said.
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.
(Reporting by Bernard Vaughan and Jonathan Stempel in New York; Additional reporting by Brian Grow in Atlanta; Editing by Nick Zieminski, John Wallace and Lisa Shumaker)