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We are entering the critical spring borrowing base redetermination season, which as we previewed previously is the biggest threat to near-insolvent energy companies whose banks may, and in many cases will, decide their assets are worth far less and as a result dramatically cut their revolver availability. One of the biggest question marks in his period was how generous would the banks of troubled gas giant Chesapeake be, whose $4 billion credit facility is one of the few things keeping the company still afloat.
We got the answer earlier today when the company announced it had succeeded in maintaining its entire $4 billion borrowing base and as a result would not suffer an imminent liquidity crunch. From the release:
Chesapeake Energy Corporation today announced it has amended its $4.0 billion secured revolving credit facility agreement maturing in 2019 with its bank syndicate group. Key attributes include:
• Borrowing base reaffirmed at $4.0 billion, consistent with current availability
• Next scheduled redetermination of borrowing base postponed until June 2017
• Senior secured leverage ratio covenant relief granted until September 2017
• Interest coverage ratio covenant reduced to 0.65x through March 2017
Following the recent redetermination review by its bank syndicate group, Chesapeake's senior secured revolving credit facility borrowing base was reaffirmed at $4.0 billion, consistent with current availability.
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The stock promptly took off and was some 13 percent higher at last check.
(Click to enlarge)
At the same time, Chesapeake’s $1.1 billion of 5.75 percent notes maturing in March 2023 jumped 3.25 cents to 36.25 cents on the dollar.
However, this bank "generosity" came at a cost, because this is what else CHK announced:
In connection with the redetermination, Chesapeake agreed to pledge additional assets as collateral under the Credit Agreement.
What additional assets? Pretty much all of them.
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As Bloomberg reports, to preserve its full availability, Chesapeake was forced to pledge almost all of its natural gas fields, real estate and derivatives contracts to maintain access to its existing credit as the shale gas producer grapples with falling energy prices.
Chesapeake amended a secured revolving credit agreement that matures in 2019 with lenders, who agreed to postpone the next evaluation until June 2017, the Oklahoma City-based company said in a statement Monday. Such reassessments normally occur twice a year. In exchange, Chesapeake pledged “substantially all of the company’s assets, including mortgages encumbering 90 percent of all the company’s proved oil and gas properties” as collateral, according to a regulatory filing on Monday.
As described by Citi analysts, the amendment provides Chesapeake with "time to ride out a low commodity price environment”. The company probably will issue a secured, first-lien term loan to retire its remaining 2017 and 2018 bonds, the analysts said.
In addition to most of its gas and oil reserves, Chesapeake pledged as collateral all hedge contracts, property, deposit accounts and securities, subject to certain undisclosed carve-outs, according to the regulatory filing.
The amendment includes a collateral value coverage test, which Chesapeake said may limit its ability to tap the credit line. The revision also provides temporary covenant relief, with a key measure of indebtedness suspended until September 2017. During the grace period, Chesapeake promised to maintain minimum liquidity of $500 million. Chesapeake also maintains the right to incur as much as $2.5 billion of first lien indebtedness.
But while the stock may be delighted at this latest "can kicking", the unpleasant reality remains, namely that unless something dramatically changes in the company's income statement, Chesapeake has merely bought itself a few quarters of time while in the process stripping unsecured bondholders of any potential recoveries if and when it files for bankruptcy.
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Chief Executive Officer Doug Lawler has employed a combination of debt exchanges, asset sales and open-market purchases of Chesapeake’s cut-rate bonds to reduce leverage and cope with falling gas prices. Chesapeake’s main focus is 2017 and 2018 “maturity management,” Lawler said in a presentation to analysts last month. In other words, without a dramatic rebound in commodity prices, Chesapeake has about a year before it hits a refinancing wall at which point it will have to replace its current cheap debt with far more expensive funding, which will likely hand over major equity stakes to the existing bondholders, unless of course the company does not file Chapter 11 (or 7) long before.
And here is the punchline: the company lost about $40 million a day in 2015 and is expected to end this year in the red as well, based on the average estimate of 14 analysts in a Bloomberg survey.
The daily cash burn will only increase as Chesapeake is layered with even more debt and has to fund even more interest expense, which for the time being is manageable due to the existing low blended cost of its debt, but which will spike over the coming two years.
The banks however, don't care: they now are assured full control of all the company's assets when the hammer hits. As for the bondholders, there is always prayer and hope that soon the same "production freeze" headlines that push oil higher on a daily basis will finally shift over to natural gas.
Someone else who won't care if the company he built from scratch is handed over to the lenders: Aubrey McClendon who may have had a sense that all of this was coming long ago.
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