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Behind Chesapeake Energy’s Stock Reaction after Debt Swap Announcement

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CHK’s stock

After its debt swap announcement, Chesapeake Energy’s (CHK) stock initially spiked to $4.63 on May 12, 2016, but closed at $4.17, down 4.3% compared to the previous close. YoY (year-over-year), CHK’s stock has declined by 73%.

Behind Chesapeake Energy's Stock Reaction after Debt Swap Announcement

In the past two weeks alone, CHK’s stock has dropped by 41%, significantly underperforming the broader industry Energy Select Sector SPDR ETF (XLE) and the broader market SPDR S&P 500 ETF (SPY). While CHK’s stock is considerably lower than last year’s levels, it has risen significantly since the February 2016 lows of ~$1.70.

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In early February, CHK fell significantly on reports that the company was looking to restructure its ~$10 billion debt load. However, following this, the company issued a press release, stating that “Chesapeake currently has no plans to pursue bankruptcy and is aggressively seeking to maximize value for all shareholders.”

Investors and creditors confident about CHK’s odds of survival

Despite its massive debt load, CHK still seems to have investor optimism given that bondholders are willing to swap debt for equity (in the event of bankruptcy, debt holders get priority before equity holders). This suggests investor sentiment and that CHK will not necessarily meet the same fate as Penn Virginia (PVA) and Linn Energy (LINE), both of which filed for Chapter 11 bankruptcy last week. (Read the Market Realist series Linn Energy Filed for Bankruptcy Protection: Will BBEP Follow? for more on this.)

Additionally, CHK also seems to have creditor support. The date for the next review of its credit facility’s borrowing base has been pushed to June 2017 from the previously announced October 2016. On April 11, 2016, Chesapeake Energy announced that it had amended its $4 billion secured revolving credit facility. The borrowing base was reaffirmed at $4 billion.

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