Chesapeake Wins Early Bond Call Over Hedge Funds and BNY
Chesapeake Energy Corp. (CHK) won a bid to carry out an early call of $1.3 billion in bonds at par after a judge rejected arguments by the notes’ trustee, Bank of New York Mellon Corp., and investors including River Birch Capital LLC.
Chesapeake met a March 15 deadline in the notes’ indenture contract for redeeming the bonds six years early at 100 cents on the dollar, U.S. District Judge Paul Engelmayer ruled today in Manhattan. Chesapeake has said a plan to refinance the debt will save about $100 million by tapping lower interest rates.
The 6.775 percent notes due in March 2019 dropped 7.2 cents to 100.8 cents on the dollar as of 10:27 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Chesapeake, the second-biggest producer of natural gas in the U.S., sued BNY Mellon in March after the bank challenged its bid to redeem the notes. The energy company argued the March 15 deadline in the indenture was for sending a notice of early redemption to investors. The bank argued the date was for such a call to be executed, and that notice should have been sent at least a month earlier.
“BNY Mellon’s construction” of the deadline language “is veritably riddled with canonical and logical problems, and brings various provisions of the indenture into irreconcilable conflict with each other,” Engelmayer said in the ruling. BNY Mellon’s interpretation is “tortured and incoherent.”
Chesapeake Chief Financial Officer Nick Dell’Osso, who testified at a three-day trial last month, said in a statement today that the company is “pleased” with the ruling.
Bank of New York Mellon’s spokesman, Kevin Heine, declined to comment on the judgment when reached by phone and said the bank would “continue to represent the interests of the bondholders in our role as trustee.”
Bank of New York Mellon initially agreed with Chesapeake in February that the early redemption would meet the deadline. The New York-based trustee changed its position after River Birch argued Chesapeake had started the process too late, Chesapeake said in court papers.
Chesapeake issued the notes in February 2012 to access short-term financing after an unusually warm winter caused a “significant” drop in natural-gas prices, according to the ruling. Bank of America Merrill Lynch proposed the gas company try a debt offering with an “unusual feature” allowing it to call the bonds early in their lifetime, after planned asset sales that were already under way, it said.
About a year later, on Feb. 15, River Birch bought some of notes after it believed Chesapeake had missed the window to redeem the notes at par, James Seery Jr., a lawyer at the hedge fund, said in a March 12 court filing. As of March, the hedge fund held $16.7 million of the securities.
Though River Birch wasn’t sued along with Bank of New York Mellon, it joined a group of investors holding a total of about $250 million in the bonds to formally intervene in the lawsuit, so it could make arguments in court. The group dropped out of the case before the trial.
Steve Kurz, a spokesman for River Birch, declined to comment on today’s ruling when reached by phone.
Other investors that intervened in support of Bank of New York Mellon’s view included 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.
Chesapeake had several ways it could have improved the language of the early-call provision in the indenture contract and avoided market confusion, Engelmayer said. It could have replaced the phrase “may redeem” with “may commence the redemption process,” the judge said.
“This regrettable circumstance was of course readily preventable,” Engelmayer said. “Chesapeake’s failure to draft” the indenture language “optimally or with perfect clarity does not make its construction unreasonable. A provision, even if clumsily drafted, may still be subject to a single reasonable interpretation.”
BNY Mellon had “persuasively shown” that Chesapeake’s use of the word “redeem” in the indenture was uncommon in the industry, Engelmayer said.
“It ordinarily and customarily refers to the act of paying a noteholder in exchange for his or her note,” Engelmayer said. “It does not ordinarily or customarily refer to the act of giving notice of a redemption or to the overall redemption process.”
Under questioning from Engelmayer on April 30, Chesapeake’s lawyer, Richard Ziegler, said there was no “rational, economic benefit” for Chesapeake, which issued the notes in February 2012, to define the deadline the way BNY Mellon had.
Engelmayer had said in court hearings that Chesapeake’s employees’ confusion over the deadline would weigh on his decision. Elliot Chambers, Chesapeake’s assistant treasurer and vice president of finance, wrote as recently as Jan. 9 that the company would need to complete the early call by March 15 to do so at par, according to internal e-mails submitted in the case. He was called by the bank to testify at the trial, where he said his earlier views on the deadline were mistaken.
Bank of New York Mellon suffered a setback earlier in the lawsuit when Engelmayer rejected the trustee’s argument that if Chesapeake lost the case, it should be forced to carry out the early redemption anyway, and pay all of the interest due over the life of the loans, or about $400 million. Engelmayer referred to the demand as “trickery” during a March 12 hearing, and BNY Mellon later dropped the demand.
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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