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

At the same time, we lowered our senior secured rating on Chesapeake's second-lien debt to 'CCC+' from 'B' and removed the rating from CreditWatch where we placed it with negative implications on Jan. 25, 2016. We revised the recovery rating on this debt to '2' from '1'. The recovery rating of '2' indicates our expectation of substantial (70% to 90%, lower half of range) recovery in the event of a payment default.

In addition, we lowered the rating on the company's first-lien senior secured debt to 'B-' from 'B'. The recovery rating on this debt remains '1', indicating our expectation for very high (90% to 100%) recovery in the event of a payment default. Finally, we lowered the senior unsecured debt ratings to 'CC' from 'CCC-'. The recovery rating on this debt remains '6', reflecting our expectation for negligible recovery (0% to 10%) in the event of a payment default. The rating on the company's preferred stock remains 'D'.

"The downgrade reflects the potential that Chesapeake could pursue a further debt exchange over the next 12 months and that we would view a transaction as distressed rather than opportunistic, and which we would consider a selective default," said Standard & Poor's credit analyst Paul Harvey. "This follows the announcement that Chesapeake is working with Kirkland & Ellis LLP to improve its balance sheet and likely to help address upcoming maturities," he added.

The negative outlook reflects the potential that Chesapeake could launch an exchange offer or other refinancing we would view as distressed, resulting in lowering the corporate rating to 'SD' (selective default). Additionally, the negative outlook reflects our expectation that financial measures will remain very weak over the next 24 months based on our natural gas and crude oil prices assumptions. Under these challenging conditions, we expect debt leverage to exceed 12x on average. Additionally, liquidity is likely to be challenged under these low prices, both from diminished cash flows and potential reductions in the company's borrowing base. If the company fails to improve liquidity or financial measures we could lower ratings.

We could raise the rating if Chesapeake can address upcoming debt maturities and putable debt such that we do not expect a distressed exchange, likely in conjunction with expectations for improving financial measures.