S&P Upgrades Chesapeake Energy (CHK) to 'CCC' Following Senior Unsecured Note Exchange

Late last Friday, S&P Global Ratings raised the corporate credit rating on Chesapeake Energy Corp. (NYSE: CHK) to 'CCC' from 'SD'. The outlook is negative.

The issue-level and recovery ratings on the company's debt are unchanged.

"We raised the corporate credit rating on Chesapeake to reflect our reassessment of its credit profile following the exchange of its 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 and putable in 2018," said S&P Global Ratings credit analyst Paul Harvey. "The rating reflects our expectation that debt leverage will remain at what we consider unsustainable levels over the next 24 months and that liquidity will remain challenged as Chesapeake faces a very heavy maturity and put schedule that could significantly weaken current liquidity levels," he added.

In 2017, Chesapeake has about $1.4 billion of debt that matures or can be put to it including its $344 million 6.25% euro–denominated notes due January 2017, $315 million 6.5% senior notes due August 2017, and $730 million 2.5% contingent convertible notes due 2037 that can be put to the company for cash in May 2017. In addition, Chesapeake has about $1.8 billion of debt maturities or putable debt in 2018 through 2019; therefore, liquidity remains a key credit factor in our analysis.

We are maintaining the 'D' issue-level ratings on the 6.5% senior notes due 2017, 2.5% convertible notes due 2037 (putable 2017), 2.25% convertible notes due 2038 (putable 2018), 7.25% senior notes due 2018, floating rate notes due 2019, 6.125% senior notes due 2021, 5.375% senior notes due 2021, and 4.875% senior notes due 2022. These ratings are unchanged to reflect the potential that Chesapeake could execute additional exchanges on these notes, although none are expected at this time, given the benefits to liquidity from retiring debt at even a modest discount to par. As a result, we would not lower the corporate credit rating to 'SD' should there be additional distressed exchanges of these notes.

The negative outlook reflects the the potential to lower ratings if liquidity materially weakens from current levels, or if Chesapeake commences a material exchange offer that we would consider distressed as it addresses its onerous maturity profile over the next two to three years. Despite recent asset sales, liquidity is likely to remain challenged due to a heavy debt maturity schedule, including putable debt over the next 24 months, as well as the company's currently unsustainable leverage.

We could raise the rating if Chesapeake can address upcoming debt maturities and putable debt such that we no longer expect liquidity to meaningfully deteriorate next year, likely in conjunction with expectations for improving financial measures.

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