Chesapeake Energy Corp on Thursday failed to win a court order allowing it to redeem $1.3 billion of notes early at a favorable price, a setback for the second-largest U.S. natural gas company as it tries to close a potential $4 billion cash shortfall this year.
The decision was announced by U.S. District Judge Paul Engelmayer at a hearing in Manhattan federal court.
Bond trustee Bank of New York Mellon Corp and a group of investors holding $250 million of the notes had opposed the proposed redemption, saying it would cause irreparable harm.
Chesapeake should instead be subject to a "make-whole" provision, they said, on the 6.775 percent notes maturing in 2019 that the company had estimated could cost an extra $400 million.
Chesapeake sued BNY Mellon on March 8, saying that March 15 was the last day it could notify investors of an early redemption and avoid the make-whole provision, which it feared would give investors a windfall.
The price of the notes rose to a record high after the ruling. At 5 p.m. EDT, the notes were up 1.75 cents at 107.25 cents on the dollar, and the yield fell to 5.34 percent from 5.68 percent, according to bond pricing service Trace.
Chesapeake likewise had argued that not being able to issue a notice of redemption at the on-par price by March 15 would subject it to irreparable harm. BNY Mellon and the noteholders had argued the actual redemption had to take place by March 15.
In refusing to grant a preliminary injunction authorizing the redemption at 100 cents on the dollar, Engelmayer said Chesapeake had failed to show it would suffer irreparable harm.
But the judge said if Chesapeake did issue the early notice, it would likely not have to pay the $400 million extra. Language in Chesapeake's proposed notice to redeem the notes early makes it clear that it would be null and void if the court were to find later that it was issued too late, Engelmayer said.
It would be "reckless" to expect him to rule that the proposed notice triggered the make-whole payment, he added and said the company had taken a "rational approach ... to a difficult problem" in crafting the proposed notice.
The judge told both sides to update him on Monday on their progress, and he scheduled a status conference on the matter for Tuesday.
"The ball is now in Chesapeake's court" as to whether to issue a notice on Friday to redeem the notes, said Engelmayer, who urged the parties to meet that day or over the weekend to come to a resolution.
Chesapeake shares closed up $1.12, or 5.2 percent, at $22.52 on the New York Stock Exchange. The ruling came after U.S. stock markets closed.
Officials with Chesapeake and Steven Bierman, an attorney for the noteholders, declined to comment after the hearing.
The case is Chesapeake Energy Corp. v. Bank of New York Mellon Trust Co NA, U.S. District Court, Southern District of New York, No. 13-01582.
(Reporting by Bernard Vaughan and Jonathan Stempel in New York; Editing by Gary Hill, Dale Hudson and Leslie Gevirtz)