S&P Downgrades Chesapeake Energy (CHK) to 'SD'; Notes Recent Debt-for-Equity Exchange

Key Points:

• Chesapeake Energy Corp. announced it has or will exchange portions of its debt maturing or putable in 2018, 2019, 2021, 2022, and 2038.We view the exchanges as distressed because the investors are receiving less than the original promise and the company is currently holding, in our view, an over leveraged capital structure with potential liquidity issues in the near-term due to total 2017 maturities and a likely put totaling about $1.5 billion
• We are lowering the corporate credit rating to 'SD' from 'CCC'
• We are lowering the ratings on the 7.25% senior notes due 2018, floating-rate senior notes due 2019, 5.375% senior notes due 2021, 6.125% senior notes due 2021, 4.875% senior notes due 2022, and 2.25% contingent convertible senior notes due 2038 to 'D'.

S&P Global Ratings lowered the corporate credit rating on Chesapeake Energy Corp. (NYSE: CHK) to 'SD' from 'CCC'. At the same time, we lowered the ratings on the company's 7.25% senior notes due 2018, floating-rate senior notes due 2019, 5.375% senior notes due 2021, 6.125% senior notes due 2021, 4.875% senior notes due 2022, and 2.25% contingent convertible senior notes due 2038 to 'D' from 'CC'. The recovery ratings on these notes remain '6', indicating our expectation of negligible (0%-10%) in the event of a payment default.

The downgrades reflect our assessment that the debt for equity exchange on Chesapeake's 7.25% senior notes due 2018, floating-rate senior notes due 2019, 5.375% senior notes due 2021, 6.125% senior notes due 2021, 4.875% senior notes due 2022, and 2.25% contingent convertible senior notes due 2038 (putable in 2018) was a distressed exchange based on the holders receiving less than the original promised amount, and our view that the company is holding an unsustainable capital structure and is facing a potential sharp liquidity contraction next year. Chesapeake has about $1.5 billion maturing or putable in 2017. We believe Chesapeake will continue to execute further exchanges of their debt, given the benefits to liquidity from retiring debt at even a modest discount to par.

We note that while we may raise the corporate credit rating to reflect the company's ongoing default risk, we expect to maintain the 'D' issue-level rating on the exchanged debt because we expect there to be a high likelihood of additional sub-par exchanges on these issues.

You May Also Be Interested In

• Hilton Worldwide (HLT) PT Raised to $205 at Macquarie, 'we await a better entry point'
• TechnipFMC (FTI) PT Raised to $30 at BTIG
• Merck (MRK) PT Raised to $143 at Truist Securities