Citi Just Upgraded The Worst Debt On Chesapeake's Books

Citi’s Marisa B. Moss mentioned that Chesapeake Energy Corporation CHK has announced an amendment to its RBL “that is more constructive than we or the market was expecting.”

The analyst upgraded the rating on the company from Underweight to Marketweight.

Reasons For The Upgrade

Moss explained that the catalysts to the upgrade included a decline in Chesapeake Energy’s borrowing base to below the estimate of 20 percent, along with the company having undertaken more open market purchases “to reduce the maturity wall.”

“The credit facility amendment also loosened covenants and put a hold on redeterminations, giving CHK time to ride out a low commodity price environment.,” Moss stated.

Bond Upgrades

Due to the restriction in the second lien covenants, the analyst expects the company to issue a secured first lien term loan that could be used to take-out the 2017-2018 bonds.

Moss also upgraded Chesapeake Energy’s 2019 and 2018 notes to Buy, while upgrading the rest of the complex to Neutral.

The analyst views the company’s announcement regarding the RBL amendment as a positive for the complex, including the second lien.

“Although the 2nds will likely be primed with 1st lien paper, there was already priming risk from a 1.5 lien,” Moss stated, while adding, “We expect that there will either be an exchange for the 2017 & 2018 notes into a 1st lien or they will be taken out at par at maturity.”