Chesapeake Energy Said to Increase Term Loan to $4 Billion

Chesapeake Energy Corp. (CHK), the second-largest U.S. gas producer, increased the size of a term loan it’s seeking to pay off a revolving credit line to $4 billion from $3 billion, according to data compiled by Bloomberg.

“That level of demand is an encouraging sign of the market’s demand for Chesapeake debt at these price levels,” Brian Gibbons, an analyst at CreditSights Inc. in New York, wrote in an e-mail.

The debt, due in December 2017, began trading this afternoon at 98.25 cents on the dollar, according to Markit Group Ltd.

Chesapeake sold the loan at 97 cents on the dollar, up from 96 cents originally offered, Bloomberg data show. The change in the so-called original issue discount increases proceeds for the company and reduces the yield to investors.

The loan pays interest at 7 percentage points more than the London interbank offered rate with a 1.5 percent minimum on the benchmark, according to Bloomberg data.

“The yield is compelling and people have to pay attention to it,” Philip Adams, a Chicago-based senior bond analyst at Gimme Credit LLC, said today in a telephone interview. “It’s also helpful there’s some insight into how much the Permian Basin assets might be worth.”

Photographer: Daniel Acker/Bloomberg

A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford County, Pennsylvania. Close

A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford... Read More

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Photographer: Daniel Acker/Bloomberg

A natural gas drilling rig stands on a Chesapeake Energy Corp. drill site in Bradford County, Pennsylvania.

Permian Basin

Chesapeake’s 1.5 million acres in the Texas-based Permian Basin may be worth $6.82 billion, based on the price Concho Resources Inc. (CXO) agreed to pay this week for oil fields in the same area.

While obtaining the loan provides Chesapeake with additional liquidity, its “ability to remain in compliance with its debt covenants in the future and rising leverage metrics remain concerns,” analysts led by Peter Speer, vice president and senior credit officer at Moody’s Investors Service in New York wrote in a research report yesterday.

Moody’s rates the company Ba2 with a “negative” outlook, noting that Chesapeake’s is nearing restrictions under its ratio of debt to earnings before interest, taxes, depreciation and amortization requirement as its Ebitda falls due to increase in natural gas prices.

“The unsecured loan is intended to signal to the market place that Chesapeake has the liquidity to continue to execute its 2012 business plan, and that it won’t be forced to sell these assets at a fire sale price,” Gimme Credit’s Adams wrote in a research note yesterday.

Bonds Rise

The company’s $1 billion of 6.125 percent bonds rose 0.75 cents at 3:45 p.m. in New York, to 90.75 cents on the dollar, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Chesapeake, based in Oklahoma City, is planning on completing asset sales totaling $9 billion to $11.5 billion and a portion of those proceeds will be used to repay the loan, according to a May 11 company statement distributed by Business Wire.

Standard & Poor’s today downgraded Chesapeake one level, to BB- from BB, citing “covenant concerns” and the probability that Chesapeake will “face an even wider gap between its operating cash flow and planned capital expenditures.”

Goldman Sachs Group Inc. and Jefferies Group Inc. are arranging the financing and were seeking commitments from lenders today at 10 a.m. in New York, according to the data.

Jim Gipson, a spokesman for Chesapeake, didn’t return a telephone call or e-mail seeking comment.

To contact the reporters on this story: Michael Amato in New York at mamato3@bloomberg.net; Krista Giovacco in New York at kgiovacco1@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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