Chesapeake Energy Corp. shares dropped as much as 6.5 percent on Tuesday following a credit rating downgrade and news that the natural gas producer will boost its borrowings to $4 billion from the planned $3 billion as it faces a liquidity crunch.
The company, facing a funding shortfall of $9 billion to $10 billion this year, said on F riday that Goldman Sachs and Jefferies Group would provide it with $3 billion.
Chesapeake's cash flows have shrunk as natural gas prices slumped to their lowest levels in a decade, putting pressure on the second-largest U.S. producer of the fuel to raise money to fund drilling operations.
Ratings agency Standard & Poor's said it had cut Chesapeake's credit rating to "BB-" from "BB," one notch lower into noninvestment, or "junk," status. S&P cited shortcomings in the company's corporate governance practices, concerns about loan covenants and the likelihood of a wider gap between operating cash flow and capital expenditures.
Reuters reported last month that Chief Executive Aubrey McClendon had borrowed at least $1.1 billion against his personal stakes in the company's wells from lenders who also had dealings with Chesapeake, a deal that analysts and academics said raises possible conflicts of interest.
McClendon also ran a $200 million hedge fund that traded in the same commodity, natural gas, that the company Oklahoma City, Oklahoma-based produces, Reuters reported.
Funding needs for the company over the next two years are likely to be higher than expected, according to S&P credit analyst Scott Sprinzer, who described Chesapeake's liquidity in a statement as "less than adequate."
The new, expensive unsecured bridge loan will replace an existing $4 billion debt facility. Company executives said on Monday they had drawn more than $3 billion of that existing debt line. Demand from yield-hungry investors for the bridge loan was huge.
"I mean really...Chesapeake is forced to issue debt at higher levels than ever with incredibly onerous terms in an interest rate environment that's the lowest most of us have ever seen in our lifetimes?" asked Bonnie Baha, portfolio manager at DoubleLine, which oversees $34 billion in assets under management. "It's absolutely untenable."
Suntrust Robinson Humphrey analyst Neal Dingmann said he was encouraged by the increase in the loan size, which he believes will give Chesapeake more flexibility as it sells 1.5 million acres in the Permian basin in West Texas and looks for a joint venture partner for its position in the Mississippi Lime basin in Oklahoma and Kansas.
"A company that is running out of financial options and everybody knows they need to do some deals, the closer they get to that point the more nervous everybody is going to get," Dingmann said. "Hopefully this is going to abate some of those fears. You've basically just taken the cash up front."
Chesapeake's lenders on the bridge loan, Goldman and Jefferies, are also advisors on the Permian asset sale, a move that signals confidence that the deal will close. Proceeds from the asset sales will be used to pay back the loan, which carries a big 8.5 percent interest rate.
Chesapeake has said those deals are expected to close in the third quarter.
The cost to insure the company's debt against potential default fell on the loan news.
Five-year credit default swaps tightened by 13.5 basis points to 770 basis points on Tuesday. That means it costs $770,000 a year for five years to insure $10 million of debt, according to data from Markit Group.
Shares of Chesapeake were down 5 percent at $14.74 in midday trading after falling as low as $14.52 earlier in the day.
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