By Matt Wirz
The Second Circuit U.S. Court of Appeals dealt a setback to
Chesapeake Energy Corp. on Tuesday, in the company's long-running
fight with a group of hedge funds over bonds it redeemed 18 months
ago.
The decision could cost the company more than $400 million by
forcing it to make disputed payments to bondholders.
The appeals court overturned a 2013 ruling by U.S. District
Judge Paul Engelmayer and remanded the case to him to reconsider
his decision.
Chesapeake stock fell 1.4% to $23.73.
"We are reviewing this decision and assessing our options moving
forward, " a Chesapeake spokeswoman said in an email.
The dispute hinges on Chesapeake's redemption at par of a $1.3
billion bond in March of 2013. Bondholders argued that Chesapeake
owed them an additional payment because it failed to notify them of
its decision 30 days before calling the debt as required. The
bondholders are seeking a make-whole payment, which is a penalty
companies pay to bondholders for redeeming debt before
maturity.
Many of the holders were hedge funds, including Aurelius Capital
Management and River Birch Capital, which snapped up the bonds
based on the belief that Chesapeake was legally required to make a
payment that at the time was worth 29 cents on the dollar, or about
$380 million.
Judge Engelmayer ruled in May of last year that Chesapeake
shouldn't be forced to make the payment as a result of the
indenture's clumsy wording.
But the appellate court said that "under the unambiguous terms
of the indenture, the notice wasn't timely." The ruling validates
forecasts by some analysts, like CRT Capital's Kevin Starke, that
the appeals court would side with bondholders.
The value of that payment has grown to around $430 million
because it has been accruing interest at 9% a year.
Chesapeake had $4 billion of cash on Sept. 30, according to the
company's third-quarter earnings report.
A gray market for claims to the payment emerged in May of 2013
when Chesapeake paid off the bonds in May 2013. The claims were
quoted between 16 and 20 cents on the dollar this afternoon, up
from a 10 to 15 cents before the ruling, Mr. Starke says.
Write to Matt Wirz at matthieu.wirz@wsj.com
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