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Rating Action:

Moody's downgrades Chesapeake's senior notes to B3; assigns B1 rating to new second lien notes

04 Dec 2015

Approximately $11 billion of rated senior notes affected

New York, December 04, 2015 -- Moody's Investors Service downgraded Chesapeake Energy Corporation's (Chesapeake) Corporate Family Rating (CFR) to B2 from Ba2, the Probability of Default Rating (PDR) to B2-PD from Ba2-PD, and the company's senior unsecured notes ratings to B3 from Ba3. Moody's also assigned a B1 rating to Chesapeake's proposed $1.5 billion second lien secured notes. Affirmed the Speculative Grade Liquidity (SGL) Rating at SGL-3. The rating outlook remains negative.

The senior secured second lien notes due 2022 are being offered in exchange for outstanding senior unsecured notes. Our ratings are subject to review of all final documentation related to this transaction and the total amount of second lien secured notes issued and senior unsecured notes retired.

"The ratings downgrade reflects Chesapeake's persistently weak cash flow and the corresponding rising default risk. Industry conditions are increasingly challenging for Chesapeake to complete asset sales of the scale necessary to reduce debt to sustainable levels," commented Pete Speer, Moody's Senior Vice President.

Downgrades:

..Issuer: Chesapeake Energy Corporation

.... Probability of Default Rating, Downgraded to B2-PD from Ba2-PD

.... Corporate Family Rating, Downgraded to B2 from Ba2

....Senior Unsecured Conv./Exch. Bond/Debentures, Downgraded to B3 (LGD 5) from Ba3 (LGD 4)

....Senior Unsecured Regular Bond/Debentures, Downgraded to B3 (LGD 5) from Ba3 (LGD 4)

....Senior Unsecured Shelf, Downgraded to (P)B3 from (P)Ba3

Assignments:

....Senior Secured Regular Bond/Debenture, Assigned B1 (LGD 3)

Affirmations:

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

Outlook Actions:

....Outlook, Remains Negative

RATINGS RATIONALE

The downgrade to a B2 CFR incorporates Chesapeake's very weak cash flow generation capacity relative to its debt levels and the rising downside risk to oil and gas prices for 2016. This weakening and uncertain outlook for prices increases the amount of debt reduction necessary to right size the capital structure while making large asset sales more difficult as buyers remain reticent. The B2 CFR is supported by Chesapeake's adequate liquidity and very large proved reserve and production scale and its sizable high quality undeveloped acreage positions in multiple oil and natural gas basins across the US, which provide a substantial inventory of potential assets to sell in a more supportive commodity price environment.

Chesapeake launched a debt exchange offer on December 2, 2015, offering $1.5 billion senior secured second lien notes in exchange for outstanding senior unsecured notes. The purpose of the exchange offer is to reduce Chesapeake's total outstanding indebtedness and to extend the maturity date of some of the company's near-term maturities. The exchange grants priority acceptance to near-term maturities, potentially reducing Chesapeake's sizable 2017 notes maturities and thereby enhancing its liquidity and debt maturity profile. The transaction would also reduce total debt outstanding and could lower cash interest expense. After the exchange is completed, Moody's will evaluate the results to determine whether it is a distressed exchange and a default under our definitions. Regardless of that determination, Moody's views this transaction as indicative of the rising risk that further debt restructurings may become necessary without a substantial improvement in industry conditions.

Chesapeake's proposed second lien secured notes are rated B1, one notch above the B2 CFR, reflecting their priority claim to company's assets over the senior unsecured notes that remain outstanding after the exchange. Moody's views the B1 rating as more appropriate than the higher rating that would be arrived at under Moody's Loss Given Default Methodology, given that the exchange offer could be increased or further second lien debt could be issued in the future. The second lien notes claim is subordinate to Chesapeake's $4 billion senior secured revolving credit facility, which is secured by much, but not all, of the company's proved oil and gas reserves. Chesapeake's senior notes are unsecured with guarantees on a senior unsecured basis from the company's material subsidiaries. The senior notes are rated B3, or one notch below the CFR reflecting their effective subordination to the secured revolving credit facility and second lien notes. If the second lien notes exchange offer is substantially increased over the current $2 billion secured debt basket with a further decrease in senior notes, that could result in a downgrade of both the second lien and senior notes ratings, depending on the final mix of debt in the capital structure.

The SGL-3 rating reflects Moody's expectation that Chesapeake's liquidity will remain adequate through 2016 because of its cash balance and borrowing availability on its credit facility. At September 30, 2015 the company had a cash balance of $1.4 billion (pro forma for the convertible notes redemption in November 2015) and full availability on its $4 billion revolving credit facility. The cash and revolver availability should be sufficient to cover the company's anticipated negative free cash flow and debt maturities in 2016.

The revolver's amended financial covenants provide some headroom for continued compliance, although the interest coverage covenant could become tight with weaker commodity prices. While the revolver will be subject to future borrowing base redeterminations, the company has some unpledged reserves that could be added to support the existing borrowing base. Chesapeake expects to complete $200 to $300 million of asset sales in this quarter, demonstrating that the company can still complete some asset sales to raise cash.

The rating outlook is negative, reflecting the company's likely declining production and reserve volumes in 2016, downside risk to commodity prices and the aforementioned challenges of completing asset sales to sufficiently reduce its debt balances in this negative industry environment. If Chesapeake is not able to greatly improve its financial leverage metrics through debt repayment and improved cash flow generation then its ratings could be downgraded further. Retained cash flow to debt sustained below 5% or EBITDA/Interest below 1.5x could result in a ratings downgrade.

In order for Chesapeake's ratings to be upgraded the company will have to achieve substantial debt repayment and improve its leverage metrics and liquidity so that it can better weather commodity price volatility. RCF/debt sustainable above 10% with a leveraged full-cycle ratio above 1x could support a ratings upgrade.

The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Chesapeake Energy Corporation is headquartered in Oklahoma City, Oklahoma and is one of the largest independent exploration and production companies in North America.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Speer
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Chesapeake's senior notes to B3; assigns B1 rating to new second lien notes
No Related Data.
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