Chesapeake Energy (CHK) Unsecured Debt Placed on CreditWatch Negative by S&P; Corp. Rating Affirmed

Standard & Poor's Ratings Services said it affirmed its 'BB-' corporate credit rating on Chesapeake Energy Corp. (NYSE: CHK). The outlook is negative.

At the same time, we placed the company's unsecured debt ratings on CreditWatch with negative implications to reflect the addition of incremental secured debt and the likelihood of a downgrade following the close of the announced exchange offer.

Finally, we raised the rating on Chesapeake's $4 billion credit facility to 'BB+' from 'BB-' to reflect its conversion to a secured facility from an unsecured facility. The recovery rating of '1' reflects our expectation for "very high" recovery (90% to 100%) if a payment default occurs.

The ratings affirmation reflects our assessment that the recently announced $1.5 billion exchange offer represents an opportunistic, proactive refinancing of debt, and not a distressed exchange.

"Under our base case assumptions, we expect Chesapeake to have adequate liquidity to manage its near-to-medium term maturities, which is reflected in our "adequate" liquidity assessment. We also do not expect a conventional default on the debt over the near–to-medium term without the refinancing," said Standard & Poor's credit analyst Paul Harvey.

The negative CreditWatch listing on the senior unsecured debt reflects our expectation that the recovery expectations for those obligations will fall at least one category following the exchange due to the addition of second-lien priority debt to the capital structure. We have assumed that Chesapeake will use the full $2 billion of junior-lien debt allowed under the credit facility to assist with upcoming debt maturities through 2017.

Finally, although the exchange offer could provide modest deleveraging compared with our earlier forecast, it does not materially alter our expectations for financial measures. We expect measures to remain in the "highly leveraged" category, and that they will be highly sensitive to natural gas and crude oil prices, which is reflected in the negative outlook. If we were to lower our base case price assumptions, we could lower ratings, if the company did not take additional steps to reduce debt or rein in capital spending.

The negative outlook on Chesapeake Energy reflects the potential for a negative rating action over the next 12 months given our expectation for continued challenging industry conditions and potential for weaker credit measures and liquidity beyond current expectations.

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