S&P Cuts Chesapeake Energy (CHK) to 'SD' Following Nonconvertible Notes Tender

S&P Global Ratings lowered the corporate credit rating on Chesapeake Energy Corp. (NYSE: CHK) to 'SD' from 'CC' following the early settlement of accepted nonconvertible senior notes tendered prior to the early tender date (Aug. 25, 2016), under its tender offer for nonconvertible senior notes that commenced on Aug. 15, 2016. We viewed the below-par tender offer for the 2020 and 2023 senior notes as a distressed transaction.

At the same time, we lowered the ratings on its 6.625% notes due 2020, 6.875% notes due 2020, and 5.75% notes due 2023 to 'D' from 'CC'. The recovery rating remains '6', reflecting our expectation of negligible (0%-10%) recovery in the event of a payment default.

We are also correcting the ratings on Chesapeake's 2.75% convertible notes due 2035 and euro-denominated notes due 2017 by placing them on CreditWatch with positive implications, in line with the company's other debt not subject to a below par exchange or tender offer. The recovery ratings on these issues remain '6'.

The issue-level ratings on the company's first-lien and second-lien debt are unaffected by this action and remain on CreditWatch with positive implications.

The downgrade follows the early settlement of accepted nonconvertible senior notes tendered prior to the early tender date (Aug. 25, 2016) of Chesapeake's $800 million tender offer for its nonconvertible senior notes. We view the tenders on the 6.625% notes due 2020, 6.875% notes due 2020, and 5.75% notes due 2023 as a selective default because investors received a material discount to par on these notes.

The positive CreditWatch listings on the first-lien credit facility, first-lien second-out term loan facility, second-lien notes, and certain senior unsecured notes reflect the potential to raise the corporate credit rating to 'CCC+' when we reassess Chesapeake following the close of the nonconvertible senior note tender on Sept. 26, 2016.

The potential upgrade reflects the material improvement to liquidity over the next 12 months following the tenders for its contingent convertible and nonconvertible senior notes, including the refinancing of about $600 million convertible notes due 2037 (putable May 15, 2017), significant debt reduction over the past year, and the benefits following the conveyance of its Barnett Shale assets. These benefits include an expected $200 million to $300 million annual increase to operating income through 2019, incorporating the elimination of estimated minimum volume commitments (MVCs) related to the Barnett of $170 million through the remainder of 2016 and $230 million in 2017. Additionally, the CreditWatch placement reflects the expected positive impact to the PV-10 value of proved reserves following the Barnett conveyance, which Chesapeake estimates at about $550 million under SEC guidelines, and the potential that we could raise recovery expectations on the second lien and unsecured notes.

We expect to review the corporate credit rating and resolve the CreditWatch listings soon after the close of the tender offer on Sept. 26, 2016.

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