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Chesapeake Energy Corporation (CHK): The Trouble Of Getting Paid Early

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There’s always something going on with Chesapeake Energy Corporation (NYSE:CHK). The giant gas & oil company never seems to get tired of surprising its shareholders and noteholders alike. Just a couple of months ago – Carl Icahn, the famous activist investor, first disclosed a major equity stake in the company following a 30% plummet in the share price, then came a sudden departure of its dominant and frivolous CEO, Aubrey McClendon, and now the company is catching headlines again. This time around it’s about a clash between the interests of bondholders to be paid upfront and the interests of shareholders to avoid a forced sale of highly lucrative assets.

Earnings Quality Report: Chesapeake Energy Corp. (NYSE: CHK)

To be paid or not to be paid?

The story de jour is about an early redemption of the company’s $1.3 billion 6.775% bond series maturing on March 2019. Chesapeake Energy Corporation (NYSE:CHK) wanted to redeem the notes early at par (100 cents). The noteholders, on the other hand, weren’t too crazy about being paid early. They contended that the company’s plan would shortchange them because if such redemption is to take place, it should be at the currently prevailing bond price at around $106, and not at par. This issue turned into an ugly dispute and the court was left to decide on this pending matter.

Who benefits the most from this plan?

There’s only one obvious winner here and that’s Chesapeake Energy Corporation (NYSE:CHK)’s shareholders. By redeeming the notes early, the company will save about $400 million in payments. That’s not to be taken lightly- for a company with a debt balance of $13 billion, of which $4 billion is due to be paid back this year, every dollar counts. Whether the company will actually have to pay the extra $400 million or not remains to be seen.

So, what’s the lesson?

I believe there are two interesting lessons in this strange fiasco:

  1. “Callable bonds” (bonds that could be redeemed early by the company) usually end up as one big mess for bondholders. The company always seems to ‘call’ (redeem) them at the worst possible time for investors, and when they are redeemed – there is always a question of price. Chesapeake Energy Corporation (NYSE:CHK) bondholders can attest to that.
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