Chesapeake Bondholders Owed $440 Million on Appeals Court Ruling

(Bloomberg) -- Chesapeake Energy Corp. owes bondholders $440 million for improperly redeeming a 2012 bond issue early, a U.S. appeals court said in upholding a ruling that dealt another blow to the second-largest natural gas producer in the country.

The New York federal court case has been a bitter, drawn-out battle between Chesapeake and Bank of New York Mellon Corp., which acted as trustee for the notes. Chesapeake sued BNY Mellon in 2013 after the bank challenged the early redemption, saying the energy company violated the terms of the offering and needed to pay the bondholders in full.

The total payment represents $380 million plus interest, according to Thursday’s ruling by the appeals court in New York. The three-judge panel unanimously found Chesapeake should pay the full "make-whole" amount, rather than the lower $100 million payment advocated by the company that would have compensated the bondholders for the par value of the offering. The courts found Chesapeake failed to give investors enough notice for the early redemption.

Chesapeake said it was disappointed with the ruling and will pursue its legal options. It can now ask the court’s full panel to reconsider the decision.

Reserves Made

“We were prepared for this potential outcome and have reserved the liquidity to address it through previous postings of letters of credit,” Gordon Pennoyer, a Chesapeake spokesman, said in an e-mail.

The bonds, a series of senior notes with a total value of $1.3 billion, were issued in 2012 at 6.775 percent interest and scheduled to mature in 2019. The company had an option in the offering to redeem them in March 2013 if it gave a one-month notice. Chesapeake, which once warned investors that it could run out of money in 2013, called the notes early in an effort to refinance the debt and save $100 million in interest costs.

Last year, U.S. District Judge Paul Engelmayer ruled in favor of the bondholders for the “make-whole” payment, or the present value of all future interest payments, in addition to the principal amount.

A BNY Mellon spokesman didn’t respond to a request seeking comment.

The case is Chesapeake Energy Corp. v. The Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).