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Ruling will save Chesapeake $100 million in interest payments

By Bob Downing Published: May 8, 2013

From Bloomberg News:

By Erik Larson

Chesapeake Energy Corp. won a bid to save $100 million in interest payments by carrying out an early call of $1.3 billion in bonds at par after a judge ruled against the notes’ trustee, Bank of New York Mellon Corp.

Chesapeake, the second-biggest producer of natural gas in the U.S., met a March 15 deadline in the indenture contract to redeem the notes early at 100 cents on the dollar, U.S. District Judge Paul Engelmayer ruled today in Manhattan.

Chesapeake sued BNY Mellon in March after the bank challenged its bid to redeem the 6.775 percent notes six years early and refinance the debt -- a plan that will save the company about $100 million because of lower interest rates. The gas producer notified investors of the early call on March 15.

“Chesapeake’s notice of special early redemption, issued on March 15, 2013, was timely and effective to redeem the 2019 notes under the special early redemption terms,” Engelmayer said.

Chesapeake, the second-biggest producer of natural gas in the U.S., sued BNY Mellon seeking a court order that March 15 was the deadline for sending a notice of early redemption of the notes due in March 2019 to investors. The bank argued the deadline was for the early call to be executed, and that notice should have been sent at least a month earlier.

Engelmayer said at a hearing on April 30 that Chesapeake had “any number of ways” it could have improved the language of the bond contract to clarify a deadline for early redemption at par and avoid market confusion. The failure to make such changes before issuing the notes led to the lawsuit being filed, the judge said.

Earlier Evidence

Evidence that Chesapeake presented during the trial about the intention of the indenture drafters when setting the deadline wasn’t available to investors who bought the notes earlier, Engelmayer said at last month’s hearing.

Under questioning from Engelmayer on April 30, Ziegler said there was no “rational, economic benefit” for Chesapeake, which issued the notes in February 2012, to define the deadline the way BNY Mellon had.

Engelmayer said in earlier court hearings that Chesapeake’s employees’ confusion over the deadline would weigh on his decision after Bank of New York Mellon provided evidence that some people at the gas company didn’t understand the meaning of the deadline once the early redemption started being considered in January.

Elliot Chambers, Chesapeake’s assistant treasurer and vice president of finance, wrote as recently as Jan. 9 that the company would need to complete the early call by March 15 to do so at par, according to internal e-mails submitted in the case. He was called by the bank to testify at the trial, during which he said his earlier views on the deadline were mistaken.

The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co., 13-cv-01582, U.S. District Court, Southern District of New York (Manhattan).

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