Chesapeake Energy Corp. (CHK) finds out today whether it will win an emergency court order allowing it to start redeeming $1.3 billion in notes early without paying $400 million in interest sought by Bank of New York Mellon Corp.
The scheduled decision by U.S. District Judge Paul Engelmayer in Manhattan, expected at a 3 p.m. hearing, may permit Chesapeake to issue an early-redemption notice to bondholders by tomorrow or thwart its bid to call the 6.775 percent notes at par, or 100 cents on the dollar, and refinance a portion of the company’s debt.
Chesapeake, the second-biggest U.S. natural-gas producer, sued BNY Mellon, the trustee for the notes, on March 8, seeking a preliminary injunction barring the bank and a group of noteholders from treating the proposed early call as a “make whole” redemption that would include the extra interest. Chesapeake has said that if the court demands a make-whole payment, the company won’t seek to redeem the bonds.
At issue is whether the contract for the notes allows an early-redemption notice to be sent by a March 15 deadline, or whether the call would need to be completed by that date, thus requiring notice weeks earlier. At a hearing on Tuesday, Engelmayer criticized Bank of New York Mellon and the noteholders for appearing to take advantage of ambiguity in the contract and position themselves for an undeserved windfall.
The judge didn’t say that day which way he would rule and said all the parties involved had made strong arguments.
Chesapeake argues that it may issue the notice of early redemption by March 15 and avoid the make-whole provision, even if the call is completed as long as 60 days later.
BNY Mellon is backed in the case by the group of noteholders, including hedge funds, that aren’t parties in the lawsuit and whose holdings total about $250 million.
Both sides of the dispute quoted from different parts of the bond issue’s indenture paperwork to back their interpretation of the deadline. Engelmayer called the language of the indenture “ambiguous” at the Tuesday hearing and asked detailed questions about how it had been drafted and who was involved.
The judge’s options are to award the injunction and allow Chesapeake to issue the call notice without risk, or deny it and prevent the early redemption from taking place. The judge also indicated he could deny the injunction while still issuing an order potentially barring the “make whole” demand, allowing a trial on whose version of the deadline is correct.
The notes, issued in February 2012 and due March 2019, were pushed to a record 105.9 cents on the dollar the day the suit was filed, a signal traders may believe Oklahoma City-based Chesapeake would have to pay a premium to call the debt.
The notes fell 0.25 cent to 105.25 cents on the dollar to yield 5.727 percent as of 9:21 a.m. today in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
On March 12, several of the investors calling themselves an “ad hoc noteholder group” won court permission to intervene in the litigation, a status that allows them to attend hearings and file court papers.
They include Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLP, Monarch Alternative Capital LP, Schoenfeld Asset Management LP, River Birch Capital LLC and Taconic Capital Advisors LP.
BNY Mellon (BK) and the noteholders argued that Chesapeake isn’t in danger of irreparable harm, a standard for obtaining an injunction, because the energy company can seek money damages if it wins and won’t suffer permanently. The bank also said Chesapeake can’t prove it has a likelihood of success, another requirement.
BNY Mellon initially supported Chesapeake’s plan when the energy company first discussed early redemption with the bank on Feb. 20, according to the complaint. Two days later, the bank changed its mind, Chesapeake said.
The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Erik Larson in New York at firstname.lastname@example.org