Chesapeake Calls Bonds After Judge Rules on ‘Make-Whole’

Chesapeake Energy Corp. (CHK) issued a notice to redeem $1.3 billion in bonds early, at par, after a judge ruled that the gas producer would probably prevail in court over any demand to pay $400 million in extra interest.

The company said in a statement today that it will continue to pursue a lawsuit in Manhattan federal court to confirm that it has met the deadline to redeem without triggering a “make- whole” provision that would require paying the extra interest.

U.S. District Judge Paul Engelmayer in Manhattan yesterday denied Chesapeake’s bid for an order barring a “make-whole” request by indenture trustee Bank of New York Mellon Corp. and noteholders, while saying there was little risk Chesapeake would ever be forced to make the extra payment if it chose to take the dispute to trial.

“The court stated multiple times that it is ‘overwhelmingly’ likely that the company’s notice to redeem at par will not be determined by the court to be a notice to redeem under the ‘make-whole’ provision of the indenture, even if the notice to redeem at par is ultimately deemed untimely,” Oklahoma City-based Chesapeake said in today’s statement.

Payment will be made on May 13 subject to a court ruling that Chesapeake met its deadline, according to the statement.

Photographer: Daniel Acker/Bloomberg

Chesapeake, the second-biggest natural gas producer in the U.S., sued March 8 seeking a court order allowing it to issue a notice to bondholders by today that it would redeem the 6.775 percent notes at par, or 100 cents on the dollar, six years before they mature and without risk of a make-whole demand. Close

Chesapeake, the second-biggest natural gas producer in the U.S., sued March 8 seeking a... Read More

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Photographer: Daniel Acker/Bloomberg

Chesapeake, the second-biggest natural gas producer in the U.S., sued March 8 seeking a court order allowing it to issue a notice to bondholders by today that it would redeem the 6.775 percent notes at par, or 100 cents on the dollar, six years before they mature and without risk of a make-whole demand.

Notes Fall

The $1.3 billion of 6.775 percent notes due March 2019 fell 2.75 cents on the dollar to 104.5 cents to yield 5.87 percent at 8:53 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The shares rose 11 cents to $22.63 at 8:56 a.m. before the start of regular trading on the New York Stock Exchange.

Chesapeake has argued that today is the deadline for it to issue a notice of early redemption and avoid the make-whole provision. BNY Mellon (BK) has said the call would have to be completed today and it’s now too late. Engelmayer said the contract was ambiguous and he would need to see evidence about how it was drafted before deciding at a trial who is correct.

“Chesapeake is overwhelmingly likely to win on this point if it’s ever litigated,” Engelmayer said of the make-whole payment yesterday. Ambiguity in the indenture on the point of the deadline “should not be read as a make-whole windfall for noteholders,” he said.

Suit Filed

Chesapeake, the second-biggest natural gas producer in the U.S., sued March 8 seeking a court order allowing it to issue a notice to bondholders by today that it would redeem the 6.775 percent notes at par, or 100 cents on the dollar, six years before they mature and without risk of a make-whole demand.

BNY Mellon, the world’s largest custody bank, triggered the lawsuits after it initially agreed with Chesapeake and then changed its position when noteholders objected.

Kevin Heine, a spokesman for the bank, declined to comment on the redemption notice.

Engelmayer said yesterday that he would rush a trial within 60 days if Chesapeake chose to issue an early redemption notice.

Chesapeake didn’t win the preliminary injunction yesterday because, Engelmayer said, it hadn’t shown it would suffer “irreparable harm” without one, citing a requirement for such an order.

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 federal court in Manhattan at elarson4@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net;

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