S&P cuts Chesapeake’s credit rating further into junk on funding needs
Chesapeake Energy was hit by a credit rating downgrade yesterday following news that the natural gas producer will extend its borrowings to $4bn (£2.5bn) from the planned $3bn as it faces a liquidity crunch.
Chesapeake’s cash flows have shrunk as natural gas prices have slumped to their lowest levels in a decade, putting pressure on the second-largest US producer of the fuel to raise money to fund drilling operations.
Ratings agency Standard & Poor’s said it had cut Chesapeake’s credit rating to “BB-” from “BB,” one notch lower into non-investment, or “junk,” status. S&P cited shortcomings in the company’s corporate governance practices, concerns about loan covenants and the likelihood of a wider gap between operating cash flow and capital expenditures.
Funding needs for the company over the next two years are likely to be higher than expected, according to S&P credit analyst Scott Sprinzer, who described Chesapeake’s liquidity in a statement as “less than adequate.”
The new, expensive unsecured bridge loan will replace an existing $4bn debt facility. Company executives said on Monday they had drawn more than $3bn of that existing debt line. Demand from yield-hungry investors for the bridge loan was huge.
“I mean really…Chesapeake is forced to issue debt at higher levels than ever with incredibly onerous terms in an interest rate environment that’s the lowest most of us have ever seen in our lifetimes?” asked Bonnie Baha, portfolio manager at DoubleLine, which oversees $34bn in assets under management. “It’s absolutely untenable.”