Chesapeake Energy frees up assets and creeps towards cash flow neutrality with dual-tranche drive-by

Chesapeake Energy’s USD 1.25bn dual-tranche driveby bond, which follows the sale of its Utica assets to Encino Energy, reduces interest expense and pushes the well-known issuer further towards cash flow neutrality, according to six buysiders and one sellsider following the deal.

The company plans to use proceeds from the Goldman Sachs-led dual-tranche USD 1.25bn deal to repay outstanding borrowings on its USD 1.5bn L+750bps (1% floor) term loan due 2021 and fund general corporate purposes.

The eight-year non-call three tranche is talked in the 7.5% area, while the six-year non-call 2.5-year tranche is talked in the 7% to 7.25% range, in line with whispers earlier today. Chesapeake’s existing USD 1.3bn 8% senior unsecured notes due 2025 traded today at 103 to yield 7.172%, up from recent trades in the 101/102 context, according to MarketAxess. Both tranches are rated B-/Caa1.

Chesapeake, which has spent recent years grappling with a heavy debt load, is still burning cash. But the new deal will help reduce that cash burn as well as free up assets that were pledged to its secured credit facility, giving it more flexibility to handle upcoming maturities, sources said.

The new bond offering should reduce Chesapeake’s annual interest expense by roughly USD 20m-25m, said two of the sources. By replacing secured debt with unsecured, the deal also gives Chesapeake more flexibility to handle its upcoming maturities, sources added.

“The deal frees up debt capacity and incrementally moves them in the right direction to eventually becoming cash flow neutral,” said one buysider.

Assuming LTM adjusted EBITDA remains more or less flat to the USD 2.443bn Chesapeake reported in 2Q18, the company should burn roughly USD 640m of cash in 2018, based on capex remaining flat at roughly USD 2.421bn and USD 666m of total pro forma interest expense, sources said.

The company’s recent expansion in the Powder River Basin—as well as the potential use of its expected USD 2bn of proceeds from the Utica sale to pay down debt—could further reduce its cash burn, sources added.

Pro forma the new bond deal, Chesapeake’s leverage is around 4x, based on total pro forma debt of USD 9.8bn, according to deal documents. Liquidity stands at USD 2.221bn, with USD 2.215bn of availability on a USD 3bn revolver due 2023 and USD 6m in cash.

The transaction could attract investor interest relative to fellow E&P company Ascent Resources Utica, which is also in the market this week, three sources said. They said they preferred Chesapeake’s bonds to Ascent’s proposed BB-/B2 USD 600m senior unsecured notes due 2026, whispered in the 7% area, because of Chesapeake’s greater diversification and scale.

Ascent’s USD 1.5bn 10% senior unsecured notes due 2022 traded yesterday (24 September) at 111.375 to yield 5.829%, according to MarketAxess.

Goldman Sachs and Chesapeake did not respond to requests for comment.

2018 Debtwire

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