Moody's Investors Service assigned a provisional rating of (P)Ba3 to the proposed $275 million senior secured credit facility of Chesapeake Energy Corporation. The rating also came out in conjunction with an upgrade on the company's senior implied rating to B1 from B2 and an upgrade on its $31 million cumulative convertible preferred stock to Caa from Ca. The anticipation of a decrease in debt during 2001 from free cash flow bolstered by up-cycle price hedges prompted the positive outlook from Moody's.
The Moody's report, written by analyst Helen Calvelli, cites Chesapeake's natural gas orientation, favorable gas price fundamentals, relatively strong oil prices, and its substantial commodity price hedge position as assurance of sufficient cash flows over the near term. That should enable the acceleration of a reduction in debt in the next six to nine months. In addition, Calvelli noted that the company's recent acquisition of Gothic Production Corporation (GPC) should enhance Chesapeake's prospect portfolio and an expected upcycle commodity price windfall should provide capital to pursue drilling, development, and acquisition opportunities.
The proposed facility is notched up from the B1 senior implied rating due to substantial collateral coverage. The facility would be used to fund the change of control offer required of Chesapeake for GPC's $235 million of senior secured notes and would refinance Chesapeake's existing $100 million secured credit facility.
Calvelli explains that even though the acquisition of Gothic did not reduce debt initially it is her belief that the scale the company gained from the deal will positively affect the business through additional reserves. According to Calvelli, almost 90% of Gothic's reserves are in the Mid-Continent and Chesapeake's acquisition of the company will extend the company's reserves in the area.