We explain why Chesapeake’s new strategy is worth pondering upon
Earlier this month, Chesapeake Energy Corporation (NYSE:CHK) announced that it would redeem some of its notes before they become due. We believe the strategy to bode well for company as well as its investors, and reflects further optimism in the stock.
As per the company’s management, it would buy back its Senior Notes which were due on August 15, next year. These have an interest rate of 6.5%. Currently, the outstanding dues amount to $222.75 million, but were higher at $600 million at one point in time.
Chesapeake would pay a penalty for buying back these notes before they become due. However, this penalty seems to be of no worry as it would present the company with an option to mature these notes later at its own preferred time.
Chesapeake announced to purchase some of these notes at a premium, some at par, while some at discount. The tender for these notes expires on January 04, next year. The management is offering a premium of around 3.4% along with all the unpaid interest and accrued interest on them.
According to the latest update from Chesapeake, it has received a tender of around $88.97 million worth of notes from bondholders. Hence, the maximum which could be repurchased outside the tender offer is $133.75 million. The question is whether such decision or strategy is a wise one from the company?
Considering the accrued interest and unpaid interest, it amounts to 5.68%, whereas the company would have to pay around 3.72% if these notes were matured at their specified date. In dollar terms, this reflects that Chesapeake would have to pay roughly $133.75 million extra on the debt which it is purchasing back.
However, this neglects some important points. If we remove the interest unpaid and accrued, the effective premium amounts to 2.89% which would mean it would have to pay only $3.87 million for the notes which would mature with expense of $4.98 million.
Secondly, the company does have a substantial amount of cash and much more can be expected in lieu of asset sales so it wouldn’t be a big problem for the company. This could also provide Chesapeake with an opportunity to raise capital later when required with longer maturity and more convenient terms as its debt rating profile would also improve.