In a direct challenge to its bondholders, Chesapeake Energy Corp on Friday went ahead with its plan to buy back $1.3 billion of notes early.
Chesapeake, the second-largest U.S. natural gas company, said it issued a notice to redeem the bonds, 6.775 percent notes maturing in 2019, at 100 cents on the dollar, or par.
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It is pursuing the redemption despite failing at a Thursday hearing to persuade U.S. District Judge Paul Engelmayer in Manhattan to force bond trustee Bank of New York Mellon Corp to accept the plan.
Bank of New York Mellon and investors holding $250 million of the notes oppose the proposed redemption, saying Chesapeake acted too late.
The investor group argued that any redemption should include an extra "make-whole" payment that Chesapeake has said could cost it an extra $400 million.
Chesapeake is hoping to avoid the $400 million payment as it tries to close a potential $4 billion cash shortfall this year.
In morning trading, the price of the notes fell 3.25 cents to 104 cents on the dollar, boosting the yield to 5.97 percent from 5.34 percent, according to bond pricing service Trace. The price had risen to a record high of 108 cents on Thursday.
The dispute is separate from a U.S. Securities and Exchange Commission probe into a perk that granted Chesapeake's departing chief executive, Aubrey McClendon, a stake in company wells, and a U.S. Department of Justice probe into possible antitrust violations over Michigan land transactions.
In denying Chesapeake's request for a preliminary injunction, Engelmayer said the company had not shown it would suffer irreparable harm without one.
But Chesapeake said the judge granted "comparable relief," and said multiple times in a statement on Friday that it was "overwhelmingly" likely to win on the legal merits of its claim.
"Accordingly, the company has proceeded with the issuance of the notice of a special early redemption at par," it said.
Bank of New York Mellon spokesman Kevin Heine declined to comment.
Lawyers for the investor group did not immediately respond to requests for comment. Group members include Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLC, Monarch Alternative Capital LP, P. Schoenfeld Asset Management LP, River Birch Capital LLC and Taconic Capital Advisors LP.
Engelmayer urged the parties to update him by Monday.
In morning trading, Chesapeake shares were up 16 cents at $22.68 on the New York Stock Exchange.
The case is Chesapeake Energy Corp v. Bank of New York Mellon Trust Co, U.S. District Court, Southern District of New York, No. 13-01582.
(Reporting by Jonathan Stempel in New York and Swetha Gopinath in Bangalore; Editing by Steve Orlofsky)