Chesapeake Finds Solace in Loan Market With Boosted Debt Deal

  • Market believes the company ‘will weather the storm’
  • For investors, participating in loan ‘is a defensive play’

Chesapeake Energy Corp. boosted the size and lowered the interest on a loan that will help the company tackle its debt load as it copes with a prolonged slump in oil prices and credit downgrades.

The natural gas producer increased the deal to $1.5 billion from $1 billion and will use it to refinance debt, including backing tender offers to buy back up to $500 million of its bonds, according to statement Wednesday. Interest on the loan was cut to 8.5 percent, down from an original offer range of 8.5 percent to 8.75 percent. The warm reception to the transaction stands in sharp contrast to market sentiment as recently as February, when the company’s bonds were getting crushed amid concern that it would default on its borrowings.

“The market seems to believe that they will weather the storm for at least the next few years,” said Shaia Hosseinzadeh, who oversees energy private-equity and credit at WL Ross, the namesake firm of billionaire deal-maker Wilbur Ross.

Chesapeake has been cutting production, reducing jobs and exchanging stock for debt as the second-largest U.S. gas supplier grappled with falling fuel prices and a shareholder revolt culminating in the termination of the founder’s job. Chief Financial Officer Domenic Dell’Osso told analysts and investors on an earnings call this month that “opportunities to enter the market are improving” and that the company’s focus was reduction of its total debt.

‘Defensive Move’

The new debt will be secured by the same assets that back the company’s revolving credit facility due December 2019, with holders of the original credit pact senior to those holding the new loan, the company said. The existing debt pays interest at 2.5 percentage points more than the London interbank offered rate.

“This also is a defensive play for those investors who are moving up in the capital structure, ” Hosseinzadeh said.

The debt was arranged by Goldman Sachs Group Inc., Citigroup Inc. and Mitsubishi UFJ Financial Group Inc.

The loan’s upsizing comes amid a swelling appetite for risk as investors seek refuge from monetary policies that have crushed yields. Ultimate Fighting Championship received orders of more than $2 billion for $500 million of high-risk loans earlier this month while Western Digital Corp. was able to reduce pricing offered on a $3 billion facility last week.

“At Libor plus 7 and a half percent, it seems a generous spread,” Phil Adams, senior analyst at debt research firm Gimme Credit, said in reference to the interest rate on Chesapeake’s new loan. “They still have lots of good assets, this is a secured loan, and there is appetite out there.”

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