Chesapeake Energy Corp. (CHK:US) issued a notice to redeem $1.3 billion in bonds early, at par, after a judge ruled that the gas producer would probably prevail in court over any demand to pay $400 million in extra interest.
The company said in a statement today that it will continue to pursue a federal lawsuit to confirm that it has met the deadline to redeem without triggering a “make-whole” provision that would require paying the extra interest. The 6.775 percent notes fell the most since May.
U.S. District Judge Paul Engelmayer in Manhattan yesterday denied Chesapeake’s bid for an injunction barring a make-whole request by indenture trustee Bank of New York Mellon (BK:US) Corp. and a group of noteholders, while saying there was little risk Chesapeake would ever be forced to make the extra payment if it chose to take the dispute to trial.
“The court stated multiple times that it is ‘overwhelmingly’ likely that the company’s notice to redeem at par will not be determined by the court to be a notice to redeem under the ‘make-whole’ provision of the indenture, even if the notice to redeem at par is ultimately deemed untimely,” Oklahoma City-based Chesapeake said in today’s statement.
The $1.3 billion of 6.775 percent notes due March 2019 fell 2.75 cents on the dollar to 104.5 cents to yield 5.87 percent at 11:30 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The shares (CHK:US) rose 40 cents to $22.92 at 11:40 a.m. in New York Stock Exchange composite trading.
Chesapeake, the second-biggest (CHK:US) natural gas producer in the U.S., argued that today is the deadline for it to issue a notice of early redemption and avoid the make-whole provision. BNY Mellon (BK:US) said the call would have to be completed today and it’s now too late. Payment will be made on May 13 subject to a court ruling that Chesapeake met its deadline, according to today’s statement.
Engelmayer, in his ruling, said the contract was ambiguous and he would need to see evidence about how it was drafted before deciding at a trial which side is correct.
Engelmayer had said yesterday that “the ball is in Chesapeake’s court as to whether or not to issue the notice of special redemption,” and that if it did so, he would rush a trial outcome “comfortably” within 60 days.
“In the event that a notice is issued, this litigation needs to move forward fast, presumably with extremely expedited discovery,” Engelmayer said, referring to the production of evidence by both sides.
The judge directed Chesapeake, BNY Mellon and the group of noteholders that backed the bank to meet over the weekend and submit a joint letter to him by Monday saying what they plan to do and offer a proposed trial schedule. He tentatively scheduled another hearing on the matter for March 19 at 5 p.m.
Chesapeake sued March 8 seeking a court order allowing it to issue a notice to bondholders by today that it would redeem the 6.775 percent notes at par, or 100 cents on the dollar, six years before they mature and without risk of a make-whole demand.
BNY Mellon, the world’s largest custody bank, triggered the lawsuits after it initially agreed with Chesapeake and then changed its position when noteholder River Birch Capital LLC objected. Kevin Heine, a spokesman for the bank, declined to comment on the redemption notice.
Chesapeake may pursue the litigation so it can issue notes of the same maturity with interest of 4.75 percent to 5 percent, Brian Gibbons Jr., an analyst at New York-based CreditSights Inc., wrote in a report yesterday.
“There is some reputational risk for the company with the bondholders broadly, but we’ve seen way worse behavior rapidly forgiven,” he said.
While the dispute over the make-whole provision went in favor of Chesapeake, the company still needs to prove at trial that its interpretation of the March 15 deadline is correct to meet the goal of refinancing the debt at a lower interest rate. That means the early redemption could still be scrapped within two months if the company was wrong about the deadline. Engelmayer said the noteholders appear to have a better argument based on the early evidence he’s seen.
“On the very limited extrinsic materials submitted to me at this stage, the noteholders seem to have, slightly, the better of the argument,” Engelmayer said yesterday.
Engelmayer rejected River Birch’s claim that an early- redemption notice would cause “economic harm” to recent purchasers of the notes, particularly those who thought Feb. 13 was about the last date Chesapeake could issue such a notice and complete the call by March 15. River Birch bought the notes on Feb. 15, according to the ruling.
On March 12, River Birch and several of the other investors calling themselves an “ad hoc noteholder group” won court permission to intervene in the litigation, allowing them to attend hearings and file court papers.
The group also includes Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLP, Monarch Alternative Capital LP, Schoenfeld Asset Management LP and Taconic Capital Advisors LP.
Chesapeake didn’t win the preliminary injunction yesterday because, Engelmayer said, it hadn’t shown it would suffer “irreparable harm” without one, citing a requirement for such an order.
Steven Bierman, the lawyer for the group of investors, declined to comment when reached by phone today. BNY Mellon’s lawyer, Paul Weinstein, also declined to comment.
The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporter on this story: Erik Larson in federal court in Manhattan at email@example.com
To contact the editor responsible for this story: John Pickering at firstname.lastname@example.org;