Moody’s rates Chesapeake Energy notes Caa3

Moody's Investors Service said it assigned a Caa3 (LGD 5) rating to Chesapeake Energy Corp.'s proposed $1.1 billion convertible senior notes due 2026.

All of the existing ratings of Chesapeake, including its Caa2 corporate family rating, are unchanged.

The outlook remains positive.

The proceeds will be used to fund repurchases and repayment of the company's senior notes due 2017 and 2018 as they become due, Moody’s said.

While the notes issuance should enable Chesapeake to refinance its 2017 and 2018 maturities and improve its liquidity position, positive rating consideration for these benefits was largely captured in advance of the company's recently concluded notes tender, the agency explained.

The inferior liquidation position of the proposed convertible senior notes behind Chesapeake's secured bank revolver and term loans results in the new notes being rated Caa3, which is one notch below the Caa2 corporate family rating, Moody’s said.

The ratings incorporate the company’s weak cash flow generation relative to its still high debt levels, resulting in an unsustainable capital structure, the agency said.

Greatly reduced capital spending has led to declining production and proved reserve volumes, Moody’s added.

Even with the increase in natural gas prices since the first quarter of this year, the company is challenged to generate adequate returns on capital investment and sufficient cash flow to fund sustaining levels of capital investment.

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