S&P rates Chesapeake Energy second-lien notes BB-

Standard & Poor’s said it assigned its BB- issue-level rating to Chesapeake Energy Corp.’s $2.425 billion 8% senior secured second-lien notes due 2022. The recovery on the notes is 1, indicating S&P’s expectation of very high (90% to 100%) recovery if a payment default occurs.

S&P notes, however, that the junior-lien basket under the company’s $4 billion credit facility could allow Chesapeake to issue up to an additional $1.575 billion of junior-lien debt. A material issuance of additional permitted second-lien debt could result in a one-notch downgrade based on S&P’s Sept. 30 recovery PV-10 value of about $7.65 billion after administrative costs.

The ratings on Chesapeake Energy reflects S&P’s assessments of the company’s very high costs related to gathering, transporting and marketing that largely offset Chesapeake's otherwise low operating costs.

The negative impact on profitability offsets the benefits of Chesapeake’s large and geographically diverse resource base of onshore U.S. unconventional natural gas and liquids assets.

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