Chesapeake Bonds Drop After Cash-Flow Estimates Are Cut

The cost to protect against losses on the debt of Chesapeake Energy Corp. jumped to the highest since September 2009 as the driller, which reported an unexpected first-quarter loss, said it may run out of money next year.

Credit-default swaps on the company climbed 3.5 percentage points to 7.6 percent upfront as of about 3:30 p.m. in New York, according to CMA, which is owned by CME Group Inc. The driller’s $1.3 billion of 6.775 percent bonds due in March 2019 dropped by 4 cents to 95 cents on the dollar at 4:07 p.m., the lowest level on record, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The second-largest U.S. natural-gas producer reported a first-quarter loss of $71 million as it cut its cash flow estimates by as much as 48 percent with falling natural gas prices hurting company profits, it said in a statement yesterday. The driller also announced plans to strip CEO Aubrey McClendon of the role of chairman as investors criticized him for using company interests to secure personal loans, raising concerns over corporate governance.

“The company was headed into 2012 without any hedges on natural gas production and the market is rightfully concerned as gas prices have gone lower,” Mark Hanson, an equity analyst at Morningstar Inc. said in a telephone interview.

Company Spokesman Jim Gipson couldn’t be reached for a comment.

Make or Break

“In 2011, they thought natural gas prices had hit a rock bottom and it didn’t and now they are paying a price for it,” Hanson said. “2013 is a make or break year for the company.”

McClendon said the company had planned for an increase in debt levels in the first quarter because of low gas prices and capital expenditure, in an earnings call with investors today. Chesapeake has about $1.7 billion of bonds maturing by 2015, according to data compiled by Bloomberg. The company has a $9.5 billion year-end net long term debt target.

Natural gas prices touched a more than 10-year intraday low of $1.902 per million British Thermal Units last month on the New York Mercantile Exchange.

The cost of the Chesapeake swaps contracts means buyers of protection would pay $760,000 initially and $500,000 annually to protect $10 million of debt from default for five years.

Markit CDX Index

A gauge of corporate credit risk for U.S. issuers was little changed at a mid-price of 93.8 basis points. Earlier the index had increased by as much 1.6 basis points as data showed American companies added the fewest workers in seven months and euro-area unemployment rose to a 15-year high.

The index typically rises as investor confidence deteriorates and falls as it improves. The measure increased as employers added 119,000 workers last month, according to figures from Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 170,000 advance. The euro-area jobless rate rose to 10.9 percent in March from 10.8 percent in February, the highest since April 1997, the European Union statistics office in Luxembourg said.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

High Yield

The Markit CDX North America High Yield Index has fallen from a three-month high of 629 basis points on April 10 to about 578 basis points. That’s about 100 basis points wider than where Deutsche Bank AG analysts say it should be priced relative to a gauge of stock-market volatility known as the VIX index and corporate credit quality, strategists at the bank wrote in an April 30 report.

“As long as the 10-year Treasury yield is near 2 percent, the spread will gradually tighten another 25 to 50 basis points,” John Tierney, who was part of the team that wrote the report, said in a telephone interview.

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