Chesapeake Energy’s Love-Hate Relationship with Bondholders

chesapeak energyWhy does it not surprise me that once again, Chesapeake Energy has been in the news for something I will simply call out of the ordinary?

In recent days, Chesapeake has spent plenty of time trying to deal with the ramifications of forgetting to call its 6.775% coupon, 3/15/2019 maturing bond (CUSIP 165167CH8).  The battle with bondholders over whether Chesapeake was too late when attempting to call the bonds at par has landed the company in court.  Bondholders are arguing that if Chesapeake wants to call the 2019 maturing note, it must do so not at par, but at a make whole price.  Chesapeake believes it has the right to do so at par and has actually delivered notice to the Depositary with instructions to redeem the notes at par.

At the same time Chesapeake Energy is fighting with its bondholders over whether it will owe roughly $400 million extra dollars of interest, it also went to market with a three-part, $2.3 billion bond offering.  Before I share the details of the bond offering, I would like to bring up to speed those readers who haven’t heard about Chesapeake’s court tussle.

In a nutshell, Chesapeake’s 2019 maturing note had a “Special Early Redemption” clause that allowed the company to call it at par.  Specifically, the language reads, “At any time from and including November 15, 2012 to and including March 15, 2013 (the ‘Early Redemption Period’), the Notes will be redeemable at our option in whole, or from time to time in part, at a price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest on the Notes to be redeemed to the date of redemption.”  Thereafter, the company can redeem the bonds at “a price equal to 100% of the principal amount of the notes plus a ‘make-whole’ premium, plus accrued and unpaid interest, if any, to the date of redemption.”  Chesapeake Energy’s website also lists the redemption dates for the 2019 maturing note as being “from and including 11/15/12 to and including 03/15/13 @ 100% of principal.”

Given that Chesapeake called the bonds on March 15, 2013, you might be wondering what the problem is.  The bondholders claim Chesapeake missed its opportunity to call the bonds at par because of language in the indenture.  According to Section 3.04 (a) of the indenture, Chesapeake must provide notice of a redemption “At least 30 days but not more than 60 days before a redemption date.”  The same information can also be found in the bond’s “Prospectus Supplement” under “Redemption Procedures.”

Therefore, in order for the notes to have been redeemed during the early redemption period, Chesapeake would have had to provide at least 30 days notice well before March 15, the date on which it officially issued the call notice.  The bondholders argue that Chesapeake can’t call the bonds at par since it missed the deadline to issue the notice and still redeem the bonds by March 15.  Chesapeake argues it had until March 15 to issue the notice and still redeem the bonds at par.

My perspective on this issue is the following:  Chesapeake, for some reason, missed the deadline to call the bonds at par.  The company clearly wanted to call the bonds at par, is embarrassed, and is hoping the courts can rectify the mistake it made.  I agree with the bondholders that Chesapeake missed its opportunity to call the bonds at par.  Furthermore, Chesapeake appears unwilling to pay a make whole price at this time.  Therefore, I think the appropriate solution, at this point, is for the call notice to be deemed invalid, and for Chesapeake not to be forced to pay the make whole provision.  Instead, the bonds would remain outstanding, and Chesapeake could choose a future date to call them (at a make whole premium) if the company so desires.  I am sure this solution is not pleasing to either Chesapeake or the bondholders since neither party gets what it wants.  But Chesapeake should simply fess up and admit it made a mistake.  And bondholders should consider themselves lucky that Chesapeake made an unusual mistake and that they get to keep their bonds paying a coupon of 6.775% in this ultra-low-interest-rate world.

Chesapeake Energy is likely fed up with investors who own the 2019 maturing bond.  But at the same time, Chesapeake probably also loves its bondholders who are helping the company be able to issue lower-coupon debt and retire higher-coupon debt.  The latest example comes from the recently-priced three-part bond offering.

The newly issued Ba3/BB- (Moody’s/S&P) rated senior unsecured notes will settle on April 1, 2013 and include the following details:

  1. The 3.25% coupon, 3/15/2016 maturing note, CUSIP 165167CJ4, has a make whole call until 3/14/2014 and is continuously callable thereafter at the following prices: 101 cents-on-the-dollar from 3/15/2014 until 3/14/2015, and at par on or after 3/15/2015.  The size of the offering is $500 million. 
  2. The 5.375% coupon, 6/15/2021 maturing note, CUSIP 165167CK1, has a make whole call until 6/14/2016 and is continuously callable thereafter at the following prices: 104.031 cents-on-the-dollar from 6/15/2016 until 6/14/2017, 102.688 from 6/15/2017 until 6/14/2018, 101.344 from 6/15/2018 until 6/14/2019, and at par on or after 6/15/2019.  The size of the offering is $700 million.
  3. The 5.75% coupon, 3/15/2023 maturing note, CUSIP 165167CL9, has a make whole call at any time.  The size of the offering is $1.1 billion.  

Given Chesapeake Energy’s, shall I say, “unique” interpretation of redemption provisions for its 2019 note, I caution readers to, from here on out, be guarded in their interpretations of Chesapeake’s call provisions.

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