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CHK’s Revolving Credit Facility Amendment: What’s Changed?

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Chesapeake Energy’s amended credit facility

On April 11, 2016, Chesapeake Energy (CHK) announced that it had amended its $4 billion secured revolving credit facility. The borrowing base was reaffirmed at $4 billion. A revolving credit facility is a financial agreement between businesses and lenders that allows companies to borrow money from lenders when required, subject to a credit limit ($4 billion in CHK’s case).

Following the announcement, CHK closed 20% higher. The stock continued to rally on Tuesday, April 12, closing ~35% higher, at $6.05.

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Highlights of the amendment

  1. Collateral is to be expanded to include additional assets. which will back CHK’s debt.
  2. The senior secured leverage ratio has been suspended until September 2017, and the interest coverage ratio requirement was reduced to 0.65x from 1.1x through March 2017. This move will give CHK some room regarding the possible breaching of its debt covenants.
  3. CHK will be required to maintain a minimum liquidity of $500 million. This will increase to $750 million if its collateral coverage ratio falls below 1.1x.
  4. The amendment will allow CHK to incur up to $2.5 billion of first-lien debt, wherein its existing creditors will receive priority at the time of repayment.

The date for the next review of the credit facility’s borrowing base has been pushed to June 2017 from the previously announced October 2016. This, along with the suspension and temporary reductions of its leverage and interest coverage ratios, indicates that the natural gas company has creditor support. This explains CHK’s stock price rally, which we discussed earlier.

These amended negotiations will reduce investor concern over its solvency and help CHK focus more on efforts to improve its balance sheet position, such as asset sales. Chesapeake Energy is planning asset sales worth $1.2 billion–$1.7 billion in 2016.

Upstream companies such as Marathon Oil (MRO), Whiting Petroleum (WLL), and Anadarko Petroleum (APC) have also made asset sales one of their key strategies to bolster financial strength amid low energy prices (USO) (UNG). Combined, CHK, MRO, and APC account for 3% of XLE.

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