Raymond James: Chesapeake credit facility redetermination is a short-term positive

Chesapeake Energy Corp. (NYSE: CHK) has amended its $4.0 billion secured revolving credit facility agreement maturing in 2019 with its bank syndicate group.

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. In connection with the redetermination, Chesapeake agreed to pledge additional assets as collateral under the Credit Agreement. As part of the amendment, the next scheduled borrowing base redetermination review has been postponed, and the lenders have agreed not to exercise their interim redetermination right, in each case until June 2017. The amendment includes a collateral value coverage test, which may limit Chesapeake's borrowing capacity if its collateral coverage ratio falls below 1.25x, tested as of March 31, 2017.

The amendment provides temporary covenant relief, with the facility's senior secured leverage ratio suspended until September 2017, then reverting to 3.5x through December 2017 and decreasing to 3.0x thereafter. In addition, the amendment reduces the interest coverage ratio to 0.65x from 1.1x through March 2017, after which it will increase to 0.70x through June 2017, then reverting to 1.2x in September 2017 and to 1.25x thereafter. During the period in which the existing maintenance covenants are suspended, Chesapeake has agreed to maintain a minimum liquidity amount of $500 million at all times, increasing to $750 million if its collateral coverage ratio falls below 1.1x, tested as of December 31, 2016. The amendment also gives Chesapeake the ability to incur up to $2.5 billion of first lien indebtedness secured on a pari passu basis with the existing obligations under the Credit Agreement, subject to payment priority in favor of the existing lenders and subject to the other limitations on junior lien debt set out in the Credit Agreement.

Short-term positive
Commenting in its energy update Tuesday, Raymond James analysts said the news “should help allay fears of a potential bankruptcy in 2016 and be viewed as a short-term positive. Of note, however, while Chesapeake's lenders have relaxed certain covenants in 2016, many of these covenants actually become more restrictive in 2017.”  

Important, said the analysts, is the possible collateral value test, “which could result in reduced borrowing capacity should the company's collateral coverage ratio fall below 1.25x. Given the potential need to sell both core and non-core assets to help pay down over $10 billion in long-term debt (with significant debt maturities starting in 2017), this requirement could play a role next year.”

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