Chesapeake Energy Plunges on Reports It Hired Outside Advisors

 | Feb 08, 2016 | 10:43 AM EST
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This post was updated at 10:30 a.m. ET to reflect latest stock movement as well as pricing of Chesapeake Energy's bonds.

This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

Shares of Chesapeake Energy (CHK) plunged over 28% at Monday's open on reports that the company hired the law firm Kirkland & Ellis as its restructuring/bankruptcy attorney. The news was initally reported by Debtwire.

Chesapeake Energy's shares traded below $2 a share and the stock was halted in early trading due to volatility.

Bloomberg reported that Debtwire spoke with three people familiar with the matter who said Chesapeake Energy was seeking Kirkland & Ellis' assistance to discuss balance sheet "solutions."

Real Money reached out to Kirkland & Ellis and Chesapeake Energy to confirm the reports. The companies did not immediately respond to requests for comment. 

In December, Chesapeake Energy retained the services of Evercore Partners in a private exchange offering, in which creditors of certain existing notes were given the chance to exchange their notes for new, 8% senior secured second-lien notes due in 2022. Priority was given to notes that matured in 2017 and 2018.

Chesapeake Energy has a $500 million senior note coming due in March. Many have questioned the company's ability to cover that note as well as service its $11.6 billion debt load. While the company appeared to have sufficient assets to cover the note as of data it provided in the third quarter, it has also acknowledged that it has a lot of work to do to get its debt burden under control. Most recently, Chesapeake suspended its preferred dividend, which it estimates will help them to save $170 million annually. The company plans to use those funds to repurchase some of its debt, which is trading at steep discounts.

Indeed as the company's stock drops, the bid price of its $500 million senior note has plunged on Monday to $76 from $95, according to data compiled by Bloomberg. As the note is senior, the note has priority status should the company liquidate, but the note is also unsecured, meaning it is not backed by assets. Should things take a turn for the worse, bondholders may not receive their full principal and interest payments. This uncertainty could explain why the notes have plunged in tandem with Chesapeake's stock on reports of the company hiring outside advisors.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out & Thanks for Nothing: J.P. Morgan Says 'No Más' to Petrobras



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