Chesapeake Energy Fails Miserably

Chesapeake Energy's attempt to ease its short-term liquidity woes looks set to fail miserably after the early take-up of a debt swap offer was shunned by many of its bondholders.

 

The troubled oil and gas company extended Wednesday's deadline for the bond exchange by two days as it tried to buy time to service its massive pile of debt.

 

Participation rates from holders of the company's 2017 and 2018 bonds were just 10%-28%, amounting to just US$352m tendered in aggregate on US$1.7bn in face value. Longer-dated bonds saw around 40% participation.

 

"They aren't pretty," said CreditSights analyst Brian Gibbons on the early tender results. "There remains a lot of work for the company to get through this maturity wall and commodity price downdraft."

 

Investors now have until 5pm New York time on Friday to decide whether to commit at the early deadline for the aggressive offer, which aims to get its creditors to swap their current bonds for new senior secured second-lien bonds.

 

The company appeared to many to put real pressure on those who declined the exchange, because the new bond issue is secured debt - and would get repaid before the existing unsecured notes.

 

George Schultze, the CEO of Schultze Asset Management, which invests only in distressed debt, said the Chesapeake offer was intended to "divide and conquer" the holders of its debt.

 

"If you do not participate as a bondholder, you risk getting primed as new debt comes in ahead of you," he told IFR. "We're really starting to see distress as a lot of capital structures similar to Chesapeake's just don't make economic sense any more."

 

Bondholders have been divided into six groups with different priorities in the exchange, with the short-dated bondholders getting first priority. Some decided they would prefer to take the risk of being subordinated.

 

One investor who declined to take part said the terms offered were just not good enough.

 

"There's a lot of game theory going on about how many people will consent," he said. "We took a view that there might be better terms for people who hold out, as the company may have to do another exchange."

 

Fitch downgraded Chesapeake by two notches to Single B after the tender results because of the limited near-term liquidity relief.

 

Chesapeake's bonds have tanked since the exchange was announced on December 2. The 5.75% 2023s are trading at just 27 cents on the dollar, while the 6.25% euro-denominated 2017s were quoted at 61% of face value, and the 6.5% 2017s at 57%.

 

Many oil and gas exploration and production companies have funded their rapid growth over the past few years with massive loads of debt, primarily in the form of junk-rated bonds.

 

When crude prices were high, their business models were sustainable. But as oil has plummeted - it hit a near-11-year low last week - servicing the debt has become close to impossible.

 

After slashing its capital budget twice this year as well as writing down the value of some assets, Chesapeake hopes the debt-swap offer will push out the due date of its repayments.

 

While that looks unlikely, the company will at least be able to reduce its overall debt burden - and it said it was doubling the size of the new bond issue to US$3bn after getting tenders for US$2.8bn of unsecured bonds maturing between 2017 and 2023 by Wednesday, the initial deadline.

 

The exchange offer encompassed US$9.3bn in debt across 10 securities, and those offers that are accepted will get new secured bonds that pay an 8% coupon and mature in 2022.

 

The company has also been able to keep its US$4bn revolver, and will push maturities out on at least US$2bn in notes maturing between 2017 and 2019.

 

Fitch said it did not consider the swap a distressed exchange.

 

"The exchange is largely opportunistic and not necessary to avoid a near-term bankruptcy or payment default," the agency said. "The company has US$1.7bn of cash on hand as of September 30 2015, full availability under its US$4bn secured revolver." Asset sales are another option, Fitch said.

 

Others, however, believe the company faces an uphill battle.

 

"In a situation like this, that's not much time," said the investor, referring to the refinancing of short-term bonds. "Credit markets start to seize up."


(Reporting by Natalie Harrison; Editing by Matthew Davies)