Chesapeake, BNY Mellon Meet Over Weekend on Call Trial

Chesapeake Energy Corp. was told by a judge to meet with Bank of New York Mellon Corp. and investors this weekend to agree on a schedule for a rapid trial over whether the gas company was too late yesterday when it issued a notice to redeem $1.3 billion in bonds early at par.

The day before Chesapeake made the call, U.S. District Judge Paul Engelmayer in Manhattan denied an injunction sought by the company and directed the parties to submit a joint letter to him by March 18 saying what they plan to do going forward. He scheduled another hearing on the matter for March 19 at 5 p.m.

Chesapeake had sought an order barring BNY Mellon, the trustee, and a group of noteholders from treating the early call as a “make-whole” redemption costing an extra $400 million in interest if Chesapeake was found to be wrong about the timing of the notice. Though Chesapeake lost the request, the judge said there was little risk it would ever be forced to make the extra payment if it chose to take the dispute to trial, giving it the confidence it needed to issue the notice.

The company said in a statement yesterday that it will continue to pursue the lawsuit to confirm that it has met the deadline to redeem without triggering the make-whole provision. The 6.775 percent notes fell yesterday the most since May.

“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 yesterday’s statement.

Notes Fall

The $1.3 billion of 6.775 percent notes due March 2019 fell 2.25 cents on the dollar to 105 cents yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The shares fell 6 cents to $22.46 the same day in New York Stock Exchange trading.

Chesapeake, the second-biggest natural gas producer in the U.S., argued that yesterday was the deadline for it to issue a notice of early redemption and avoid the make-whole provision. BNY Mellon said the call would have to be completed yesterday and it’s now too late. Payment will be made on May 13 subject to a court ruling that Chesapeake met its deadline.

Engelmayer, in his ruling, said the contract was ambiguous and he would need to see evidence about how it was drafted before deciding at a trial which side is correct.

Rush Trial

Engelmayer said in his March 14 ruling that “the ball is in Chesapeake’s court as to whether or not to issue the notice of special redemption,” and that if it did so, he would rush a trial outcome “comfortably” within 60 days.

“In the event that a notice is issued, this litigation needs to move forward fast, presumably with extremely expedited discovery,” Engelmayer said, referring to the production of evidence by both sides.

Chesapeake sued on March 8, seeking a court order allowing it to issue a notice to bondholders 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 noteholder River Birch Capital LLC objected.

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

Pursue Litigation

Chesapeake may pursue the litigation so it can issue notes of the same maturity with interest of 4.75 percent to 5 percent, Brian Gibbons Jr., an analyst at New York-based CreditSights Inc., wrote in a report on March 14.

“There is some reputational risk for the company with the bondholders broadly, but we’ve seen way worse behavior rapidly forgiven,” he said.

While the dispute over the make-whole provision went in favor of Chesapeake, the company still needs to prove at trial that its interpretation of the March 15 deadline is correct to meet the goal of refinancing the debt at a lower interest rate. That means the early redemption could still be scrapped within two months if the company was wrong about the deadline. Engelmayer said the noteholders appear to have a better argument based on the early evidence he’s seen.

“On the very limited extrinsic materials submitted to me at this stage, the noteholders seem to have, slightly, the better of the argument,” Engelmayer said.

Claim Rejected

Engelmayer rejected River Birch’s claim that an early-redemption notice would cause “economic harm” to recent purchasers of the notes, particularly those who thought Feb. 13 was about the last date Chesapeake could issue such a notice and complete the call by March 15. River Birch bought the notes on Feb. 15, according to the ruling.

The group of investors involved in the case also includes 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 and Taconic Capital Advisors LP.

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).