Chesapeake Wins Bank Reprieve at Higher Risk to Bondholders

  • Unsecured $4 billion revolver gets secured after amendment
  • Change paves way for adding $2 billion in junior-lien debt

Chesapeake Energy Corp. negotiated a reprieve from its banks that comes at the expense of its bondholders.

Under a new financing agreement the embattled oil and gas producer’s unsecured $4 billion revolver will be converted into a secured credit line, according to a company statement. Chesapeake also will be able to raise as much as $2 billion in junior-lien debt, pushing its unsecured creditors further down the pecking order in extracting recoveries during a default.

The announcement sparked a selloff in the company’s bonds, erasing about $275 million in market value.

The “junior lien provision provides a liquidity lifeline –- despite further priming for unsecured holders,” Goldman Sachs Group Inc. analyst Jason Gilbert wrote in a report Thursday. The company would still need to “monetize” more than $2 billion of assets to “address upcoming maturities and (maintain) an adequate liquidity cushion,” he said.

Prior to the move, Oklahoma City-based Chesapeake had faced the risk of violating the terms of its untapped revolver as it burned through cash at a pace that unnerved investors. The company will lose a net $5.5 billion this year, the biggest annual loss since 2009, according to the mean estimate of 11 analysts compiled by Bloomberg.

Earlier this week, the company eliminated 740 jobs and let go of about one in six of its employees, as part of Chief Executive Officer Doug Lawler’s plan to combat the weak energy market by reducing headcount, selling assets, spinning off business lines and halting a 14-year run of dividend payouts to stock investors.

Chesapeake Energy's EBITDA has tanked since 2014.

Chesapeake spokesman Gordon Pennoyer declined to comment.

The market anticipated that Chesapeake’s revolver would become secured, “however we think the market was surprised by the junior liens basket, which is putting pressure on” the company’s bonds, Citigroup Inc. analysts led by Marisa Moss wrote in a report. “Although asset sales are also on the table, the ability to incur secured debt allows more certainty of funds.”

The company’s $1.3 billion of 6.625 percent unsecured notes due in August 2020 dropped 4.5 cents to 69.25 cents on the dollar at 2:56 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Chesapeake has been hamstrung as a North American energy glut pushed prices below $2.50 per million British thermal units this year, down more than 40 percent from its 2014 average of $4.26. Its shift toward crude oil production also has suffered from a more than 50 percent plunge in value from its 2014 peak.

In exchange for securing the credit line, the company was able to convince its lenders to drop a prohibitive covenant that required its net debt to remain under four times a measure of its earnings. The condition was changed to allow a secured debt leverage ratio of 3.5 times through 2017 and three times after that, Chesapeake said.

The company’s earnings before interest, taxes, debt and amortization is set to fall to $502 million in the third quarter, from as much as $1.3 billion a year ago, according to the mean estimate of 14 analysts.

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