S&P Downgrades Chesapeake Energy (CHK) to 'CC'; Outlook is Negative

August 15, 2016 3:07 PM EDT

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Highlights -

  • U.S.-based Chesapeake Energy Corp. has announced two tender offerings totaling $1 billion for its senior unsecured and convertible notes.
  • Although near-term maturities are tendered at or close to par, the longer-dated maturities, in particular, the 6.625% and 6.875% notes due 2020 and 5.75% 2023 senior notes, are at a material discount to par, which we view as a distressed transaction and selective default if those notes are included in the tender as we assume.
  • As a result, we are lowering the corporate credit rating to 'CC' from 'CCC'.
  • Chesapeake is marketing a $1 billion first-lien "second out" term loan to fund the tenders. We are assigning the term loan a 'B-' rating and a '1' recovery rating.
  • The negative outlook reflects the likelihood that we will lower the corporate credit rating to 'SD' at the close of the tender.

S&P Global Ratings today lowered its corporate credit rating on Oklahoma City-based oil and gas exploration and production company Chesapeake Energy Corp. to 'CC' from 'CCC'. The outlook is negative.

The senior secured first-lien rating remains 'B-', with a recovery of '1' and the second-lien rating remains 'CCC+', with a recovery rating of '2'. The senior unsecured and related recovery ratings and preferred stock ratings are unchanged.

We assigned a 'B-' rating to the company's proposed $1 billion first-lien second-out term loan. The recovery rating is '1', indicating our expectation of very high (90% to 100%) recovery in the event of a payment default.

The ratings on the first-lien and second-lien debt reflect our current expectation that we will return the corporate rating to 'CCC' after the completion of the transaction.
The outlook is negative.

"Once the transaction has closed, we will lower the corporate credit rating to 'SD' and the rating on the 2020 and 2023 senior unsecured notes to 'D', said S&P Global Ratings credit analyst Paul Harvey. "This reflects our expectation that the 2020 and 2023 notes will participate in the tender," he added.

Chesapeake Energy has announced two separate $500 million cash tender offers to holders of its senior unsecured notes and a second tender for its convertible notes. We view the tender for the 2020 and 2023 notes as distressed because participating note holders will receive significantly less than par value as part of the tender. Our analysis assumes the participation of the 2020 and 2023 notes. We note that, with the exception of the euro-notes, the other senior unsecured securities have already been subject to a distressed transaction and are not affected. The euro-notes are being tendered at par, including the early tender premium. The early participation deadline for the senior nonconvertible notes is Aug. 25, 2016, with a final expiration date of Sept. 12, 2016, unless extended. We expect to lower the corporate credit to 'SD' and ratings on 2020 and 2023 notes to 'D' at the close of the transaction. The company plans to use proceeds from the proposed $1 billion term loan to support the tender offers.

We will reevaluate the company's corporate credit rating and issue-level ratings following the close of the tender. Emphasis will be placed on our expectations for liquidity in the face of a still significant maturity schedule through 2018 and beyond.

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