$CHK Pledges Additional Assets to Reaffirm Credit Facility

This is good news for the cash strapped natural gas wasteland called Chesapeake. They reaffirmed a $4 bill credit facility. However, there are hitches and triggers which may pose a problem should things get dicey.

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.

The market is viewing this as good news and the stock is rallying. Let’s hope the company can keep its collateral coverage ratio above 1.25x and maintain liquidity of $500 mill; otherwise, this credit facility will come into immediate jeopardy.