Chesapeake Energy Seeks $1 Billion Loan to Refinance Debt

Chesapeake Energy Corp. is seeking a $1 billion loan as the company battered by cratering fuel prices and credit downgrades takes a step to address its $9 billion debt load.

The natural gas producer hired Goldman Sachs Group Inc., Citigroup Inc. and Mitsubishi UFJ Financial Group Inc. to arrange the five-year secured debt, it said Monday in a statement. Proceeds will refinance debt, including backing tender offers to buy back up to $500 million of its bonds, according to a separate statement.

The tender offer has resulted in S&P Global Ratings lowering its grade for Chesapeake to 10 levels below investment-grade or CC, the company said in a statement. S&P views the move as a “distressed transaction" and a “selective default” for some longer-dated notes that may be exchanged at levels “significantly less than par value as part of the tender.”

S&P has graded the loan B-, six steps below investment-grade. Moody’s Investors Service has ranked the loan one level below at Caa1.

Chesapeake has been cutting production, reducing jobs and exchanging stock for debt as it seeks to weather plunging fuel prices and a shareholder revolt that culminated with the termination of the company founder’s job. Chesapeake Chief Financial Officer Domenic Dell’Osso told analysts and investors on an earnings call this month that the company’s focus was reduction of its total debt and that its “opportunities to enter the market are improving.”

Syndication Ability 

While the loan isn’t underwritten, being instead arranged by the three banks, “we suspect the tender would not have been announced if Chesapeake Energy and banks lacked confidence in their ability to syndicate the loan,” Phil Adams, senior analyst at Gimme Credit, an independent research service on corporate bonds, wrote today in a note.

The new loan will be secured by the same collateral backing the company’s $4 billion revolving credit facility due December 2019, according to Chesapeake’s statement. The holders of the original revolving credit loan will be senior to those holding the new loan, the company said. The existing loan pays interest at 2.5 percentage points more than the London interbank offered rate.

Chesapeake, based in Oklahoma City, agreed to give away its Barnett Shale holdings to a private-equity backed operator this month to slash shipping and processing costs and to eliminate a total of $1.9 billion in long-term pipeline agreements.

As part of the accord, Chesapeake and pipeline operator Williams Partners LP renegotiated a pipeline agreement for which Chesapeake will pay Williams $400 million. The new loan should fund this payment, as well as the tender, and leave some left over for Chesapeake, according to Gimme Credit’s Adams.

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