Moody's Affirms Chesapeake Energy's (CHK) CFR at 'Caa3'; Lifts Outlook on Speculative Grade Liquidity Rating to Positive

Moody's Investors Service (Moody's) assigned a Caa1 rating to Chesapeake Energy Corporation's (Chesapeake) (NYSE: CHK) proposed $1 billion first lien last out term loan. Moody's downgraded Chesapeake's existing second lien secured notes rating to Caa2 from Caa1 and affirmed its Caa2 Corporate Family Rating (CFR) and Caa3 senior unsecured notes rating. The Speculative Grade Liquidity Rating was raised to SGL-3 from SGL-4 and the rating outlook was changed to positive from negative. Proceeds from the term loan will be used to retire senior unsecured and convertible notes pursuant to two simultaneously announced tender offers.

"The term loan issuance enables Chesapeake to refinance a meaningful portion of its 2017 and 2018 maturities, improving its liquidity position," commented Pete Speer, Moody's Senior Vice President. "The company has concluded meaningful asset sales to date and has prospects for more asset sales that could lead to additional debt reduction and enhanced capacity to fund sustaining levels of capital expenditures."

Assignments:

..Issuer: Chesapeake Energy Corporation

....Senior Secured Bank Credit Facility, Assigned Caa1- LGD3

Downgrades:

..Issuer: Chesapeake Energy Corporation

....Senior Secured Downgraded to Caa2- LGD4 from Caa1- LGD3

Upgrades:

..Issuer: Chesapeake Energy Corporation

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

Outlook Actions:

..Issuer: Chesapeake Energy Corporation

....Outlook, Changed To Positive From Negative

Affirmations:

..Issuer: Chesapeake Energy Corporation

.... Probability of Default Rating, Affirmed Caa2-PD

.... Corporate Family Rating, Affirmed Caa2

....Senior Unsecured Affirmed Caa3- LGD5

RATINGS RATIONALE

The Caa1 rating assigned to the new first lien last out term loan reflects its relative seniority in the capital structure. The term loan will have a senior secured first lien claim to Chesapeake's assets, giving it a priority claim over the company's second lien secured notes and senior unsecured notes outstanding. The term loan will share the same first lien claim to the collateral package supporting the $4 billion senior secured revolving credit facility; however, the revolver will have a priority right of payment from the collateral over the term loan, as signified in its last out position. The second lien secured notes rating was downgraded to Caa2 from Caa1 because of the increase in first lien debt and decrease in senior unsecured notes that will occur through the tender offer. The senior unsecured notes ratings were affirmed at Caa3, or one notch beneath the Caa2 CFR, in accordance with Moody's Loss Given Default Methodology.

The change in the rating outlook from negative to positive reflects the company's better than expected execution on assets sales to date, the benefits of the pending Barnett Shale divestiture and related gathering contract termination with Williams Partners (Baa3 negative), the improvement in its liquidity profile as signified by the increase in its SGL rating to SGL-3, and line of sight for more asset sales to fund further deleveraging. If Chesapeake can complete additional asset sales, further reduce debt and improve its cash flow then the ratings could be upgraded. Cash flow coverage of interest sustained above 1.5x could support a ratings upgrade. On the contrary, if Chesapeake's asset sales momentum were to decelerate and its liquidity deteriorate more rapidly than expected in advance of its upcoming debt maturities then the ratings could be downgraded.

Chesapeake's Caa2 CFR incorporates its weak cash flow generation capacity at Moody's commodity price estimates relative to its still high debt levels resulting in an unsustainable capital structure. Greatly reduced capital spending has led to declining production and proved reserve volumes. 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.

The SGL-3 rating is based on Moody's expectation that Chesapeake will maintain adequate liquidity through the end of 2017, primarily because of its committed revolving credit facility. At June 30, 2016, the company had about $3.1 billion of borrowing capacity available under its revolving credit facility. The borrowing base for the credit facility will not be subject to redetermination review until June 15, 2017 and the company has received covenant relief through June 30, 2017 with gradual step ups in the covenants thereafter. This should provide adequate headroom for covenant compliance through the end of 2017.

At June 30, 2016, Chesapeake had $1.4 billion of debt that matures or can be put to the company in 2017, and $846 million that matures or can be put in 2018. The proceeds of the term loan will be used to fund two simultaneously announced tender offers for senior notes and convertible notes. One tender offer is for the $730 million and $315 million of convertible senior notes that can be put to Chesapeake in 2017 and 2018, respectively. The second tender offer applies to senior notes maturing between 2017 and 2023, excluding the second lien secured notes due 2022. Both tenders provide for an aggregate repurchase cap of $500 million with priority given to 2017 and 2018 maturities.

Based on an expectation that a meaningful amount of 2017 and 2018 debt maturities will be refinanced to 2021 through the term loan issuance, Moody's expects that Chesapeake will maintain adequate borrowing capacity on its revolver to fund the remaining 2017 debt maturities and anticipated negative free cash flow through the end of 2017. Despite continued reductions in capital spending, Moody's forecasts continued negative free cash flow based on our commodity price estimates. Completion of further asset sales in line with the company's revised targets for this year will provide further cushion for maintaining adequate liquidity, including the revolver covenant requirement that Chesapeake maintain minimum liquidity of $500 million (cash and cash equivalents and available revolver borrowing capacity).

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

You May Also Be Interested In

• Barclays Starts Chesapeake Energy (CHK) at Equalweight
• Chesapeake Energy (CHK) PT Lowered to $115 at Jefferies
• Johnson & Johnson (JNJ) PT Lowered to $155 at Stifel