New Chesapeake Energy covenants feature 'same restrictive' covenants as 6.775% 2019 notes

By Cristal Cody

Tupelo, Miss., March 18 - Chesapeake Energy Corp. sold $2.3 billion of senior notes (Ba3/BB-/) in three tranches on Monday "with the same restrictive covenants as the 6.775% senior notes due 2019 that are being litigated," according to a report from Covenant Review, an independent credit research firm.

The Oklahoma City-based oil and natural gas exploration and production company said it plans to use a substantial portion of the proceeds from the new offering to redeem the 6.775% senior notes due 2019 at par.

On Friday, Chesapeake Energy said it delivered notice to the depositary to redeem the 2019 notes. The company also is continuing to pursue its lawsuit that requests the U.S. District Court for the Southern District of New York confirm that the notice to redeem the notes the company issued on Friday "will be timely and effective to redeem the notes at par, with payment to be made within 60 days after such notice, pursuant to the special early redemption provision of the notes."

The court is expected to issue a ruling on whether the company's March 15 notice is timely and effective under the special early redemption provision of the indenture before the notes' May 13 redemption date.

On Thursday, the court denied Chesapeake Energy's request for a preliminary injunction concerning the Bank of New York Mellon Trust Co.'s obligation to accept the company's notice of special early redemption at par.

In the offering on Monday, Chesapeake Energy sold $500 million of notes due 2016 at par to yield 3¼%, $700 million of notes due 2021 at par to yield 5 3/8% and $1.1 billion of notes due 2023 at par to yield 5¾%.

Although the restrictive covenants are the same as the 2019 notes, the new notes do have different redemption provisions, Alexander Diaz-Matos, an analyst at Covenant Review, said in the report.

Other key covenant concerns for the new notes include weak investment-grade style liens and sale/leaseback covenants, according to the report.

The liens covenant is based on securing funded debt, which allows all debt maturing in less than one year to be secured. However, other debt is not included, such as hedging obligations or mandatory redeemable preferred stock of subsidiaries, according to the report.

The liens covenant "does not adequately protect the notes against being effectively subordinated to new secured debt," Diaz-Matos said. "The broadest carve-out is for 'credit facilities,' which can be any kind of loan but not a bond and there is no dollar limit on this definition. This is obviously a dangerous and extremely overbroad carve-out."

Typical high-yield style covenants such as debt, restricted payments and asset sales are absent, according to the report.

The notes also do not offer change-of-control protection, "which is off-market for even traditional high-grade issuers," Diaz-Matos said.

The issue is fully and unconditionally guaranteed by subsidiary guarantors, which include wholly owned subsidiaries. Unrestricted subsidiaries such as Chesapeake Oilfield Services Cos., CHK C-T, CHK Utica, MAC-LP, LLC, Mid-America Midstream Gas Services, LLC, Peake Fuel Solutions, LLC and Ventura, LLC, and certain de minimis subsidiaries do not guarantee the notes.

"Silos of non-guaranteed debt can be created in the future," Diaz-Matos said. "There is no limitation on subsidiaries incurring debt, and the future guarantee provisions apply only to guarantees of debt of the company or a subsidiary guarantor. Non-guarantor subsidiaries can incur debt and have that debt guaranteed by other non-guarantor subsidiaries without triggering an obligation to guarantee the notes."

© 2015 Prospect News.
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