Chesapeake Forgot To Call Some Bonds
Chesapeake Energy has had lots of scandals over the last year or so, but now they’re embroiled in a new one that is perhaps their most damaging yet. No, I’m kidding, it’s totally trivial, but in my capital-markets-dork mind it’s kind of funny, so now I’m going to talk about it and you’re not going to listen, probably, if you know what’s good for you.
Basically: Chesapeake has some bonds that they wanted to call, and they forgot to call them, and now it’s probably but not certainly too late, and they’re suing to make sure. This is a difficulty of corporate personhood: when I do something dumb, I just get real quiet and hope no one notices, but when a company does something dumb, the particular human who did the dumb thing gets fired or yelled at or whatever, while other particular humans go around demanding a do-over.
The bonds are Chesapeake’s $1.3 billion of 6.775% notes due 2019, issued in February 2012. According to the prospectus, the bonds are:
The make-whole price is the present value of future payments discounted at T+50bps, so the call price goes sort of like this:1
- Not callable from February 2012 to November 2012, then
- callable at par from November 15, 2012 to March 15, 2013, then
- callable at a make-whole price from March 15, 2013 until maturity on March 15, 2019.
So the very worst time to call these bonds is next week, because then you have to pay ~129 points, whereas this week you have to pay 100 points. Waiting that extra week costs you $380 million.
And Chesapeake maybe missed its chance to call them this week? That’s the dispute: the indenture provides that Chesapeake has to give notice of a call at least 30 days before the call date. It has not given any notice....MORE
