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BNY Mellon Drops $400 Million Make-Whole Bid From Chesapeake

Bank of New York Mellon Corp. dropped its argument that Chesapeake Energy Corp. should pay $400 million in extra interest to bondholders if the gas company loses its lawsuit to redeem $1.3 billion in bonds early at par.

BNY Mellon, the trustee for the notes due March 2019, reversed its position on the “make-whole” payment -- which includes interest through maturity -- and doesn’t want a judge to rule on it, the second-biggest natural gas producer in the U.S. said in a filing on April 10 in federal court in Manhattan.

Bank of New York Mellon will still argue at a trial scheduled to begin April 23 that Oklahoma City-based Chesapeake missed a March 15 deadline to call the notes early at 100 cents on the dollar, according to the filing.

The bank “informed the court that it has acceded to this conclusion (without conceding that it is correct), and that if the notice sent by Chesapeake is determined to have been untimely, BNY Mellon does not intend to treat the notice as triggering a make-whole redemption,” Chesapeake said.

Chesapeake sued BNY Mellon last month after the bank said the notice was too late to redeem early at par and would instead automatically trigger a make-whole redemption. While the extra interest payment is no longer a threat, the trial will still determine if Chesapeake can execute the call and refinance some of its debt with lower interest rates.

Bank of New York Mellon’s lawyer in the case, Steven Bierman, declined to comment on the change in the bank’s position when reached yesterday by phone. Chesapeake’s spokesman, Paul Caminiti, also declined to comment.

March Footnote

The bank first notified the court of its decision to drop the make-whole demand in a footnote in a March 31 letter to U.S. District Judge Paul Engelmayer, who is overseeing the case. The letter was about an unrelated dispute over the exchange of evidence between the parties in preparation for trial.

The difference between an at par call and a make-whole redemption of the 2019 notes amounts to 30 cents on the dollar to hedge funds speculating on the outcome of the lawsuit, Chesapeake said in the April 10 filing.

Engelmayer has sought to focus the lawsuit on the meaning of the March 15 deadline in the indenture paperwork, and he earlier criticized Bank of New York Mellon and a group of investors that had intervened in the case for seeking the make-whole payment. The bank initially said it would push ahead with that claim regardless of the judge’s comments.

Redemption Notice

Chesapeake contends the March 15 deadline stated in the indenture was for the notice of early redemption to be sent to noteholders, while BNY Mellon claims the call would need to be formally completed by that date.

Chesapeake “obviously did not intend that a notice of special early redemption could inadvertently trigger a notice of make-whole redemption simply by being sent too late,” the gas company said in the April 10 filing. “An untimely notice is simply considered ineffective, and thus null and void.”

The gas company contends that even though BNY Mellon has changed its position on the make-whole payment, Engelmayer should rule on the claim at the trial. The bank wants the matter dropped from the underlying case.

“Other noteholders may disagree with the trustee’s current position,” Chesapeake said. “A prompt ruling -- to avoid any remaining uncertainty in the market concerning the potential availability of a make-whole redemption -- would significantly benefit the public interest.”

In its filing, Chesapeake said Bank of New York threatened to reinstate its earlier position on the claim if the gas company didn’t accept the dispute was no longer “justiciable” -- meaning it can’t be ruled upon -- and agree to drop it from the case.

“This threat crystallizes precisely why Chesapeake -- and the noteholders -- continue to have a justiciable interest in resolving this issue for once and for all.

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).

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