Corporate News: Chesapeake Effort Backfires --- Bond Investors Jarred by Harsh Terms of $3 Billion Short-Term Loan
Chesapeake Energy Corp.'s effort to reassure investors worried about its cash shortage backfired with bond investors who were rattled by the harsh terms of the $3 billion short-term loan the company detailed Monday.</br></br>The price of the company's junk-rated bonds dropped sharply in heavy trading, as bondholders digested the steep interest rates on the new loan and the large funding gap that led Chesapeake to agree to it.</br></br>Chesapeake's most-traded bond, due in 2020, fell 6% to 91.64 cents on the dollar, according to pricing service Benchmark Solutions. About $971 million of the oil-and-gas driller's debt changed hands, accounting for 26% of all high-yield bonds traded, according to MarketAxess.</br></br>Concerns about the possibility of default rose -- the cost of insuring $10 million of Chesapeake bonds for one year against a potential default jumped by 36% to $727,000, according to Benchmark Solutions. Ratings agencies have assigned the company's debt double-B ratings, below investment grade, and last week Moody's Investors Service lowered the outlook to negative.</br></br>The drop in bond prices contrasted sharply with a relief rally in the embattled Oklahoma City-based company's stock, which rose 4.7% to $15.50 as equity investors welcomed word of the new liquidity.