Chesapeake may still make early call without as much risk

Chesapeake Energy Corp. (CHK) still has the option to issue a notice by today to redeem $1.3 billion in bonds early, at par, after a judge ruled it would probably win in court over any demand to pay $400 million in extra interest.

While U.S. District Judge Paul Engelmayer in Manhattan yesterday denied Chesapeake’s bid for an order barring a “make whole” request by indenture trustee Bank of New York Mellon Corp. and noteholders, he said there was little risk Chesapeake would ever be forced to make the extra payment if it chose to trigger the early redemption and take the dispute to trial.

Chesapeake argued that today is the deadline for it to issue a notice of early redemption and avoid the make-whole provision. BNY Mellon (BK) has said the call would have to be completed today and it’s now too late. Engelmayer said in court that the contract was ambiguous and that he would need to see evidence about how it was drafted before deciding at a trial who is correct.

“Chesapeake is overwhelmingly likely to win on this point if it’s ever litigated,” Engelmayer said of the make-whole payment yesterday. Ambiguity in the indenture on the point of the deadline “should not be read as a make-whole windfall for noteholders,” he said.

Chesapeake, the second-biggest natural gas producer in the U.S., sued March 8 seeking a court order allowing it to issue a notice to bondholders by today that it would redeem the 6.775 percent notes at par, or 100 cents on the dollar, six years before they mature and without risk of a make-whole demand.

BNY Mellon Switch

BNY Mellon, the world’s largest custody bank, triggered the lawsuits after it initially agreed with Chesapeake and then changed its position when noteholders objected.

Engelmayer asked the parties yesterday to report to him by March 18 what they plan to do in light of his ruling. He said he would rush a trial within 60 days if Chesapeake chose to issue the early redemption notice. The 60-day deadline would ensure a decision before the redemption was actually carried out.

While the dispute over the make-whole provision appeared to lean in favor of Chesapeake, the company would still need to prove at trial that its interpretation of the March 15 deadline is correct to meet its ultimate goal of refinancing the debt at a lower interest rate while avoiding the extra interest. That means the early redemption, if Chesapeake decides to go forward with it, could still be scrapped within two months if the company was wrong about the deadline.

Chesapeake, based in Oklahoma City, told the court before yesterday’s hearing that it wouldn’t call the bonds early if it failed to win an injunction. The company’s lawyer said it didn’t anticipate what it would do with a favorable ruling that came without an injunction.

Chesapeake’s Loss

Chesapeake didn’t win the preliminary injunction because, Engelmayer said, it hadn’t shown it would suffer “irreparable harm” without one, citing a requirement for such an order.

Thomas Rohback, a litigation lawyer with Axinn, Veltrop & Harkrider LLP in Hartford, Connecticut, who isn’t involved in the case, said he wasn’t surprised by Chesapeake losing its injunction request.

“It did not make much sense to ask for an injunction where the only thing really at issue was money damages,” Rohback said in an e-mail. “Although Chesapeake argued that the redemption language was unambiguous, the very fact that Chesapeake asked for an injunction, and then asked that if they were wrong that the redemption offer should be voided seems to undercut their argument that the language was unambiguous.”

Notes Rise

The $1.3 billion of 6.775 percent notes due March 2019 rose 1.75 cents on the dollar to 107.25 cents to yield 5.34 percent yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Michael Kehs, a Chesapeake spokesman, declined to comment after yesterday’s hearing. Paul Caminiti, another spokesman who attended the hearing, declined to comment outside court after meeting with Chesapeake’s lawyer.

Kevin Heine, a spokesman for New York-based BNY Mellon, didn’t immediately return a call yesterday seeking comment on the decision.
The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).