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Chesapeake Update

04 December 2019 by jbchevrel

Chesapeake Energy Corp. (CHK) is exploring & producing oil and natural gas onshore in the US. They got E&P assets in Appalachia, the Mid-Continent, the Barnett, Bossier, and Haynesville shale plays, and the Rockies. The name is a constituent of CDX HY since series s12. Today the 5y CDS tightened aggressively at the open, by close to 10 points, going from ~51% to ~41%. This is after CHK announced a debt exchange offer. Indeed, it has engaged banks to assist with the arrangement of a secured 1L 4.5y loan for of up to $1.5B. CHK intends to use the net proceeds of the loan to finance a tender offer for unsecured notes issued by Brazos Valley Longhorn, L.L.C. and Brazos Valley Longhorn Finance Corp (both wholly-owned subsidiaries of CHK). The proceeds are also meant to fund the Brazos Valley Longhorn L.L.C.’s existing secured RCF. This partially boost CHK’s financial flexibility, as it will allow CHK’s subsidiaries to support its debt. The loan will be secured by the same collateral securing CHK's existing RCF and unconditionally guaranteed on a joint basis by CHK's subsidiaries which are guarantors under the RCF (incl. Brazos Valley). CHK's ability to establish the new term loan facility and borrow thereunder will be subject to the receipt of commitments from lenders to provide the term loan facility, the negotiation and execution of definitive loan documents, the success of the consent solicitation and other customary conditions. Though a successful exchange will give CHK’s creditors more direct support from Brazos Valley, that will be offset by an additional $1.5B secured debt ahead of them in the capital structure. It's been quite a U-turn for CHK. About a month ago, the CDS under-performed the US HY space today, by widening +6%, after CHK warned there is substantial doubt about its solvency, stating that depressed natural gas & oil prices may affects their ability to comply with leverage ratios in debt covenants, over the next 12 months. CHK had maintained a revenue stable from a year ago (~$1.2B) but had posted a bigger-than-expected loss in Q3, net -$61m. they had lost net -$145m in Q3-18. Against this backdrop, CHK’s spending outlook for 2020 had been cut by almost 1/3 to handle debt and generate FCF. CHK’s debt totalled $9.7B as of Sept. 30, up from $8.2B at the end of 2018. As per their communique last month, CHK continues to look at asset sales, deleveraging acquisitions and capital funding options.