Chesapeake Energy calls 6.775% notes at par amid make-whole dispute

By Susanna Moon

Chicago, March 15 - Chesapeake Energy Corp. said it called its 6.775% senior notes due 2019 for redemption at par, over the objections of the indenture trustee and an ad hoc noteholder group that believe that the company must make a make-whole call at this time.

The call at par also comes amid the company's failure to secure a preliminary injunction in the matter, according to a company press release.

Despite the court ruling, the company said in the release that it believed the court offered "comparable relief" to a preliminary injunction by stating "multiple times that it is 'overwhelmingly' likely that the company's notice to redeem at par will not be determined by the court to be a notice to redeem under the 'make-whole' provision of the indenture, even if the notice to redeem at par is ultimately deemed untimely."

According to the release, the court also stated, "It is overwhelmingly likely that an untimely notice of special early redemption would be held null and void, and not as requiring redemption under the entirely different make-whole price. Lest the point be unclear, I will add this: It would be reckless for any party or entity to condition its conduct or order its legal or business affairs on the assumption that the court would rule otherwise."

The company said that if the call at par is found untimely, it would be null and void, and the notes would remain outstanding. As a result, the company has proceeded to issue a notice of a special redemption at par.

More details

The notice calls for the payment to be made on May 13 under the special early redemption provision of the notes, subject to a ruling by the court that the notice is "timely and effective."

Chesapeake said it would like to redeem the notes as part of a broader refinancing of its outstanding debt.

Chesapeake noted that it was pursuing its lawsuit seeking the U.S. District Court for the Southern District of New York to confirm that the call issued Friday is "timely and effective" to redeem the notes at par.

"As the litigation proceeds, the company intends to present to the court additional facts which Chesapeake believes demonstrate the company's and the underwriters' joint and clear intent that the company would have until March 15 to issue any notice of special early redemption," Domenic J. Dell'Osso Jr., Chesapeake's chief financial officer, said in the release.

"We appreciate that the court has indicated that it will attempt to issue its ruling before the May 13 redemption date. We look forward to making our case within the next two months for the Court to issue a declaratory judgment that the company's March 15, 2013, notice is timely and effective under the special early redemption provision of the indenture."

Background on objections

Chesapeake Energy said on March 12 that it wanted to redeem the notes at par, but that the indenture trustee and an ad hoc noteholder group believed that the company must pay a make-whole premium to redeem the notes.

Having to pay the make-whole premium would cost Chesapeake $400 million, as previously noted.

The company filed the lawsuit on March 8. Indenture trustee Bank of New York Mellon Trust Co., NA and the ad hoc noteholder group, which holds about $250 million of the outstanding bonds, responded with their own court filings on March 12.

The company proposed a redemption notice of May 13 as the redemption date, according to the trustee's court filing and as previously reported.

The company priced $1.3 billion of the notes in February 2012. During the early redemption period, the notes are redeemable at par provided that the redemption would leave at least $250 million of the notes outstanding. After the early redemption period, the notes are redeemable at par plus a make-whole premium.

The early redemption period is defined as Nov. 15 to and including March 15.

At issue are the parties' differing interpretations of whether the redemption must be actually made during the early redemption period or whether the company only needs to provide notice during that period.

On page S-7 of the prospectus supplement for the notes filed with the Securities and Exchange Commission, the company said it may redeem the notes under the special early redemption provisions "so long as the notice of redemption is given during the early redemption period." The prospectus supplement also said redemption notices will be mailed at least 30 days before the redemption date.

The trustee and the noteholder group believe that because of the required notice period, it is too late to redeem the notes before the early redemption period ends on March 15.

"Chesapeake, having missed the deadline to redeem the notes at par, now demands an advisory opinion from the court, seeking to guarantee the idiosyncratic treatment of a future redemption notice which has not yet been made," Bank of New York Mellon said in its court filings, as was noted before.

The case has been assigned to judge Paul Engelmayer of the U.S. District Court of the Southern District of New York. The case number is 13-cv-01582.

Chesapeake Energy is an oil and natural gas company based in Oklahoma City.

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