Chesapeake Energy Corporation – Oklahoma City-Based E&P Files Chapter 11 with Almost $12bn of Liabilities; Executes RSA; Lines up $925mn of DIP Financing; Will Seek to Shed $7bn of Debt

[Developing story] June 28, 2020 – Chesapeake Energy Corporation and 40 affiliated Debtors (NYSE: CHK; “Chesapeake” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 20-33233. The Debtors, an independent E&P with "a geographically diverse portfolio of onshore U.S. unconventional liquids and natural gas assets," are represented by Matthew D. Cavenaugh of Jackson Walker LLP. Further board-authorized engagements include (i) Kirkland & Ellis as general bankruptcy counsel, (ii) Rothschild & Co and Intrepid Financial Partners as financial advisors and investment bankers, (iii) Alvarez & Marsal North America, LLC as restructuring advisors and (iv) Epiq Corporate Restructuring, LLC as claims agent. 

The Debtors’ lead petition notes more than 100,000 creditors; estimated assets of $16.193bn and estimated liabilities $11.792bn. These numbers are pulled from the Debtors' 2019 10-K for year end 2019 (which also notes current assets of $1.251bn). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Deutsche Bank Trust Company (as Trustee for $1.064bn 5.5% convertible senior notes due 2026), (ii) (i) Deutsche Bank Trust Company (as Trustee for $623.6mn 7.0% senior notes due 2024) and (iii) Deutsche Bank Trust Company (as Trustee for $271.8mn 4.875% convertible senior notes due 2022).

Highlights

• Debtors file with $11.792bn of liabilities and $8.916bn of funded debt
• Restructuring Support Agreement ("RSA") parties back $7.0bn debt reduction effort
• Restructuring Support Agreement manifests support of senior revolving facility lenders (100%), term loan lenders (87%),  second lien note holders (60%) and senior unsecured note holders (27%) 
• Obtains commitments for $925.0mn of DIP financing and $2.5bn exit facility
• RSA includes commitment for $600.0mn of new equity

As reported in a June 18th 8-K, on June 15th, the Debtors chose not to make interest payments of approximately $3.4mn and $10.1mn due on June 15, 2020 with respect to their outstanding 5.375% Senior Notes due 2021 and 8.000% Senior Notes due 2027. Under the indentures governing these notes, the Debtors had a 30-day grace period to make the interest payments before non-payment triggered an event of default.

In a press release announcing the filing, the Debtors advised that: “Chesapeake intends to use the proceedings to strengthen its balance sheet and restructure its legacy contractual obligations to achieve a more sustainable capital structure. Chesapeake will operate in the ordinary course during the Chapter 11 process.

Chesapeake entered into a Restructuring Support Agreement ('RSA') with 100% of the lenders under its revolving credit facility, holders of approximately 87% of the obligations under its Term Loan Agreement, approximately 60% of its senior secured second lien notes due 2025, and approximately 27% of its senior unsecured notes, pursuant to which Chesapeake will implement a Chapter 11 plan of reorganization to eliminate approximately $7 billion of debt. 

Doug Lawler, Chesapeake's President and Chief Executive Officer, commented, "We are fundamentally resetting Chesapeake's capital structure and business to address our legacy financial weaknesses and capitalize on our substantial operational strengths. By eliminating approximately $7 billion of debt and addressing the legacy contractual obligations that have hindered our performance, we are positioning Chesapeake to capitalize on our diverse operating platform and proven track record of improving capital and operating efficiencies and technical excellence. With these demonstrated strengths, and the benefit of an appropriately sized capital structure, Chesapeake will be uniquely positioned to emerge from the Chapter 11 process as a stronger and more competitive enterprise.

Despite having removed over $20 billion of leverage and financial commitments, we believe this restructuring is necessary for the long-term success and value creation of the business." 

DIP and Exit Financing

The Debtors also announced that they had secured, subject to Court approval, $925.0mnof in debtor-in-possession ("DIP") financing from certain lenders under Chesapeake's revolving credit facility. The Debtors and lenders under that facility have also agreed the principal terms of a $2.5bn exit financing facility, consisting of (i) a new $1.75bn revolving credit facility and a (ii) new $750.0mn term loan. MUFG Union Bank, N.A. is to serve as agent in respect of both the DIP and exit facilities. Additionally, the Company has the support of its term loan lenders and secured note holders to backstop a $600.0mn rights offering upon exit.  

Significant Shareholders (sourced from 2020 Proxy Statement)

• Franklin Resources, Inc.: 12.4%
• The Carlyle Group L.P.: 8.8% 
• The Vanguard Group: 8.4% 
• BlackRock, Inc.: 5.9%
• State Street Corporation: 5.4%

NOW updated by Chapter 11 filing and appearing to show reduction in shareholding by Franklin (latest 13G has 7.9%) and reduction by BlackRock (latest 13G has 2.6%) 

• Franklin Resources, Inc.: 7.69%
• The Carlyle Group L.P.: 8.84% (NB: May 15th 13G has Carlyle at 0%)
• The Vanguard Group: 8.35% 
• State Street Corporation: 5.36%

Prepetition Indebtedness

The Debtors 2019 10-K provides the following on total long-term funded debt and maturity schedule.

 About the Debtors

The Debtors are an independent exploration and production company engaged in the acquisition, exploration and development of properties to produce oil, natural gas and NGL from underground reservoirs: "We own a large and geographically diverse portfolio of onshore U.S. unconventional liquids and natural gas assets, including interests in approximately 13,500 oil and natural gas wells. We have significant positions in the liquids-rich resource plays of the Eagle Ford Shale in South Texas, the stacked pay in the Powder River Basin in Wyoming and the Anadarko Basin in northwestern Oklahoma. Our natural gas resource plays are the Marcellus Shale in the northern Appalachian Basin in Pennsylvania and the Haynesville/Bossier Shales in northwestern Louisiana.

In February 2019, we acquired WildHorse Resource Development Corporation, an oil and gas company with operations in the Eagle Ford Shale and Austin Chalk formations in southeast Texas, for approximately 717.4 million shares of our common stock and $381 million in cash, and the assumption of WildHorse’s debt of $1.4 billion as of the acquisition date of February 1, 2019. The acquisition of WildHorse expands our oil growth platform and accelerates our progress toward our strategic and financial goals of enhancing our margins, achieving sustainable free cash flow generation and reducing our net debt to EBITDAX ratio."

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