First, S&P Global Ratings downgraded the oil giant's corporate credit rating to Selective Default (SD) from CC. While CC is considered "highly vulnerable" and usually suggests that a default is a "virtual certainly, regardless of the anticipated time to default," Chesapeake does not look to be moving in the right direction with an SD rating. With that designation, S&P believes that a company has "selectively defaulted on a specific issue or class of obligations, but will continue to meet its payment obligations on other issues or classes of obligations in a timely manner."
S&P downgraded the credit rating following the early settlement of accepted nonconvertible senior notes tendered prior to the early tender date of Aug. 25. The ratings arm of S&P viewed the tender offer for senior notes due 2020 and 2023 as a distressed transaction because investors received a "material discount to par on these notes." Furthermore, S&P lowered the rating to D on various notes due 2020 and 2023. S&P Global Ratings also corrected the ratings on Chesapeake's 2.75% convertible notes due 2035 and euro-denominated notes due 2017 by placing them on CreditWatch with positive implications.
The second blow to Chesapeake came when it was revealed in an SEC filing that activist investor Carl Icahn slashed his stake in half. Icahn reported a 4.55% stake in the company compared to a 9.4% stake in August. The shares were sold from Sept.13 to Sept. 19.
"We believe that over the last few years [CEO] Doug Lawler and his team have done an admirable job, especially in light of the circumstances. We reduced our position to recognize a capital loss for tax planning purposes," Icahn said in a statement.
Despite the actions by both S&P Global Ratings and Icahn, perhaps there is a bright spot for Chesapeake. Moody's Covenant Stress Index, which measures the extent to which speculative-grade firms are at risk of violating debt covenants, improved to 5% in August as three companies, including Chesapeake, were removed from the list of those with Moody's weakest covenant quality score.
Editor's Note: This article was originally published at 10:30 a.m. EDT on Real Money on Sept. 20.
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