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Wednesday, December 30, 2015

Chesapeake Reduces Debt by Presenting "Prisoner's Dillema" to Noteholders

From The Deal:
Chesapeake Energy Corp. has increased its offering to convert its senior unsecured notes into as much as $3 billion in new second-lien notes, but even though the exchange offer was oversubscribed, the oil and gas producer still isn’t seeing much participation from the holders of notes coming due in 2017 and 2018. 
Oklahoma City-based Chesapeake announced on Wednesday, Dec. 16 that approximately $2.8 billion of its senior unsecured noteholders agreed to participate in the exchange by the early Dec. 15 deadline. The original swap was supposed to be unsecured debt for up to $1.5 billion in new second-lien notes. 
“This exchange is a bit of a prisoners’ dilemma, because if the noteholders don’t participate, they will get primed by the new second-lien debt and be junior in the capital structure, and those that do swap are doing so at a discount, but moving up the priority chain in the event that the company has future problems,” said George Schultze, the CEO of Schultze Asset Management, a hedge fund focused on distressed debt. 
He said that there is a good possibility that the exchange, which is a bit coercive, will go through, but noted that it won’t solve all of Chesapeake’s issues. 
Even if the exchange is completed, he said, “the company would still be highly leveraged and is still at risk of bankruptcy.”
Read that whole article by clicking here.

In an article for Seeking Alpha, an analyst takes a positive view of this strategy from Chesapeake:
The debt exchange has effectively eliminated roughly $1.5 billion in face value of unsecured debt and freed up approximately $770 million in liquidity prior to 2020 by pushing out the maturities of certain notes. However, I believe this to be just the beginning of an extremely opportunistic sequence of events in which Chesapeake (NYSE:CHK) will take advantage of the market's extremely pessimistic perception of the company and turn it into value for equity holders. 
The second intent of the debt exchange 
While the first tender was oversubscribed to the tune of about $240 million, the second tender was undersubscribed by about $645 million. There are a few potential explanations as to why the second tender was undersubscribed. Since the exchange was only offered to eligible note holders, the pool of eligible note holders may have been largely exhausted at this point. Another reason for this may be the fact that certain note holders are holding out now in the anticipation that the reduction in total debt is positive enough such that the remaining note holders feel they have a much better chance of recovering the entire par value of their notes. The point of the debt exchange alone was never intended to solve all of Chesapeake's debt issues. The primary intent of the debt exchange was to extend maturities and reduce debt. The secondary intent was to weaken the relative positions of the unsecured note holders by establishing a large tranche of debt ahead of them in terms of priority to strengthen the negotiating position of Chesapeake's management. As we've seen, from the moment the exchange was announced until the results came out for the second tender offer, the value of Chesapeake's unsecured debt has dropped precipitously. This will allow Chesapeake to transition into its next phase of debt reduction before they make use of large asset sales.
Continue reading that article by clicking here. 

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