Why Is Chesapeake Borrowing More Money?

Chesapeake Energy (NYSE:CHK) increased the size of an unsecured loan being sold to institutional investors to $4 billion, from $3 billion, following strong demand from investors. Goldman Sachs Bank (NYSE:GS) and Jefferies Group (NYSE:JEF) are syndicating the loan, which Chesapeake will use to repay a secured revolving credit line threatened by decade-low natural-gas prices. Chesapeake announced that the loan has been sold to a large group of institutional investors, and would bring net proceeds of $3.8 billion.

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On Friday, Chesapeake disclosed the original loan, warning about the potential delay of asset sales in a quarterly filing, which triggered a sharp selloff of its shares. The No. 2 producer of natural gas in the U.S. relies on such sales to boost its oil drilling and to keep pace with its obligations as it struggles to meet the demand of natural gas in U.S. markets. Currently, rival Exxon Mobil (NYSE:XOM) is the biggest producer of natural gas in the nation.

Analysts voiced their concerns on Tuesday regarding Chesapeake’s financial situation. Moreover, credit watchdog Standard & Poor’s downgraded its ratings to double-B-minus from double-B. S&P’s negative outlook reflects Chesapeake’s mounting turmoil and the likelihood of an even wider gap between its operating cash flow and planned capital expenditures.

The new loan Chesapeake secured from Goldman Sachs and Jefferies offers a steep premium to the company’s bonds, which traded at a yield of approximately 7 percent prior to the announcement of the financing. The most recent loan will pay an 8.5 percent interest rate through December before stepping up to 11 percent in January.

After the loan’s pricing was disclosed, investors sold off the lower-yielding bonds and placed orders for the new deal. The company’s bond yields move in the opposite direction to price. According to Market Axess, Chesapeake’s bond yields rose to more than 8 percent in trading Monday before falling back to a 7.5 percent to 8 percent range on Tuesday.

Chesapeake announced plans to repay the loan in full before the end of 2012 with money it raises from selling assets in theoil-rich Permian Basin and a stake in a joint venture in the Mississippi Lime. The company also revealed in a release Tuesday that it currently has more than $4.7 billion in liquidity.

On Monday, shares of Chesapeake Energy rose after news of the original loan sale. The company shares on Tuesday declined 5.6 percent to $14.65 at close of trading on the New York Stock Exchange.

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