• Sprott Money
    05/26/2016 - 05:58
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If Chesapeake Does Not Go Bankrupt In Just Over One Month, This Could Be The Trade Of The Year

Tyler Durden's picture




 

Back in March 2013, when nat gas, and pretty much everything else, was trading far higher than where it is today, investors who believed in the vision of Chesapeake'snow long gone CEO Aubrey McClendon had no problem writing a check for $500 million of other people's money to the Oklahoma gas giant, hoping to generate a "whopping" 3.25% return by the time the bonds matured on March 15, 2016. 

Sadly, since then things changed. 

Chesapeake - as we previously reported - is now on the verge of bankruptcy having hired K&E as a restructuring advisor, and these bonds (maturing March 15, 2016) are currently trading at 80.5 cents on the dollar.  As the chart below shows, this results in a yield that is about 100 times where it was at issue, or just shy of 300%.

Which brings up an interesting trade opportunity: yes, Chesapeake will default, but the question is when. For those who think the company will somehow survive for a more than a month without filing Chapter 11 or arranging some prepackaged bankruptcy, and actually repays the $500 million issue, this could be the trade that makes someone's full year, because with a yield of 299%, and a cash on cash return of 25% (being paid par on March 15 for a bond that can be purchased today for 80 cents), it does look somewhat attractive, especially if hedged with a short on CHK stock, which at last check was trading at an implied market cap of $1.3 billion.

Will anyone break from the revulsion herd now that FOMO has been frozen in carbonite, and put this 299% yielding trade on now, when nobody wants to touch CHK with a ten foot pole (unlike 2 years ago when the bond was oversubscribed at a 3.25% yield) or will the yield keep grinding higher? And more importantly, if not, will Chesapeake be the biggest energy bankruptcy in the US energy sector to start 2016?

The answer to all, in just over one month.

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Wed, 02/10/2016 - 13:57 | 7166039 bnbdnb
bnbdnb's picture

Look for an emergency loan from ok.gov and chickasaw.org

Wed, 02/10/2016 - 14:03 | 7166076 EscapeKey
EscapeKey's picture

or

https://www.wonga.com/

 

"Is Wonga right for you?"

the answer to this question is always no.

Wed, 02/10/2016 - 14:13 | 7166113 Buster Cherry
Buster Cherry's picture

I used to get a check from these people from some Oklahoma mineral rights my great grandpa acquired. Last one was probably 5 years ago.

When I was in OKC last time I saw they had this sprawling campus that seemed to go for miles. I feel for.the bag holders of this mess.

Wed, 02/10/2016 - 14:23 | 7166139 ToSoft4Truth
ToSoft4Truth's picture

Reads like a task for Super CalPERS!

Wed, 02/10/2016 - 14:25 | 7166141 Hippocratic Oaf
Hippocratic Oaf's picture
 
CHESAPEAKE ENERGY CORP 3.25 03/15/16 B3/CC 165167CJ4 Call 03/12/16@ Greater of 100 or Make Whole - Make Whole Call Exp 03/2014 CHESAPEAKE ENERGY CORP
Call 03/12/16@ Greater of 100 or Make Whole - Make Whole Call Exp 03/2014 165167CJ4 / US165167CJ49 Type: Corp Moody/S&P: B3/CC Coupon: 3.25 First Coupon: 09/15/13 Category: Industrial Next Coupon: 03/15/16 Delivery: Interchangeable Dated: 04/01/13 Debt Rank: Senior Unsecured

85.750/87.250
  206.796/182.282

Wed, 02/10/2016 - 14:26 | 7166153 Hippocratic Oaf
Hippocratic Oaf's picture

Real market is 85.75-87.25

A 182.282 "yield"

Wed, 02/10/2016 - 14:53 | 7166232 clipboard man
clipboard man's picture

I just saw 86.75. Somebody's betting they will hang around until at least 3/16 if the price is moving that much.

Thu, 02/11/2016 - 00:17 | 7169204 Excursionist
Excursionist's picture

I started Teabag Capital Advisors, LLC in January, and we specialize in DIP financing.

We have many balls in the air right now, but one of them can be allocated to CHK''s DIP.

Wed, 02/10/2016 - 13:57 | 7166047 hedgeless_horseman
hedgeless_horseman's picture

 

 

Anyone here a friend or relative of their bankruptcy attorney?

Don't worry.  If you happen to be a congressional staff member, insider trading is totally legal!

Wed, 02/10/2016 - 15:03 | 7166272 Fuku Ben
Fuku Ben's picture

You mean the 200 or so lawyers serving in CONgress could do something immoral, unethical and what is unlawful for everyone else and not lose their license or go to jail?

The same profession that contributed to help set up and maintain the corporate structure that currently fraudulently misrepresents itself as sovereign nations and enslaves everyone through currency theft and fraud.

There may be no depths deep enough in the abyss for the treachery of some of them.

Wed, 02/10/2016 - 13:58 | 7166058 buzzsaw99
buzzsaw99's picture

i'm in. buzzsaw needs a new pair of shoes.

Wed, 02/10/2016 - 14:02 | 7166073 rose1959
rose1959's picture

3 ways to become a frustrated investor https://www.youtube.com/watch?v=e6fZYR8_j5I

Wed, 02/10/2016 - 14:04 | 7166085 DirkDiggler11
DirkDiggler11's picture

Ha, better odds in Vegas at a Blackjack table..

Wed, 02/10/2016 - 14:05 | 7166087 knukles
knukles's picture

Huh.  Whenever I try this, I get screwed.  Whenever Goldman does it, they win big.
I wonder what "insights" the street has?  "Insights" as in material, confidential....  Nah.  I'm not suggesting anything.
They see nussing!

Wed, 02/10/2016 - 14:07 | 7166095 ParkAveFlasher
ParkAveFlasher's picture

IQ is a factor, as I am told.  Smart peoples has teh IQz.

Wed, 02/10/2016 - 14:15 | 7166118 bbq on whitehou...
bbq on whitehouse lawn's picture

what are these IQz you speak of and how did they become IQz?

Wed, 02/10/2016 - 15:13 | 7166294 Doña K
Doña K's picture

These IQz are for peoplez from Brooklyn. They are in the Italian/Polish metric systemz

Just a Jk. I could not resist

Examples: Yellenz & Sanderz (oy vey)

Wed, 02/10/2016 - 14:07 | 7166096 Lumberjack
Lumberjack's picture

I wonder what the Dallas Fed has said....

Wed, 02/10/2016 - 14:34 | 7166181 Dre4dwolf
Dre4dwolf's picture

The Fed probably bought all of it already

Wed, 02/10/2016 - 14:40 | 7166193 Pool Shark
Pool Shark's picture

 

 

Lumberjack,

You're peddling fiction, since the Dallas Fed never gives such advice...

 

Wed, 02/10/2016 - 14:16 | 7166121 jakesdad
jakesdad's picture

how does that work from a tax standpoint?  is it short-term capital gain, ordinary income, other?

 

I've got some $ to play w/...

Wed, 02/10/2016 - 14:23 | 7166140 headhunt
headhunt's picture

That is not a play, it is suicide...

Wed, 02/10/2016 - 14:16 | 7166123 replaceme
replaceme's picture

I like moneh.....

Wed, 02/10/2016 - 14:48 | 7166202 Pool Shark
Pool Shark's picture

 

 

So, you have plenty of monet?

Then you're not baroque.

 

Me, I don't have enough monet to by degas to make my van gogh...

 

 

Wed, 02/10/2016 - 14:23 | 7166136 What is The Hedge
What is The Hedge's picture

A reminder.....

GM Executives - Wealthy

GM Union Members - Wealthy

GM Company - Still in business

GM Bond Holders - Broke!!

Wed, 02/10/2016 - 14:36 | 7166185 swmnguy
swmnguy's picture

Looks like a quarter super-glued to a busy railroad track.

Wed, 02/10/2016 - 14:38 | 7166186 poland spring
poland spring's picture

How do you buy these 'bonds'? I wouldn't mind buying 5 bonds at 80 cents.

Wed, 02/10/2016 - 14:42 | 7166198 Broccoli
Broccoli's picture

That paired trade recommendation from Tyler is out of reach for a retail investor. Good luck finding available shares for shorting through an outfit like Etrade. Haven't looked at the options but I am sure the volatility premium in something like CHK eats up any potential gain.

Wed, 02/10/2016 - 14:45 | 7166208 henry chucho
henry chucho's picture

Wouldn't it be wiser to just short the stock now,and wait 1 month for it to hit the "pink sheets"?

Wed, 02/10/2016 - 14:46 | 7166211 Iam_Silverman
Iam_Silverman's picture

"this could be the trade that makes someone's full year, because with a yield of 299%, and a cash on cash return of 25% (being paid par on March 15 for a bond that can be purchased today for 80 cents), it does look somewhat attractive,"

 

But, what does the CDS spread to cover those bonds say?

 

"The biggest credit widener over the past week has been ChesapeakeEnergyCorp which has seen its 5-yr CDS spread rocket past 1,000bps for the first time in five years. The oil and natural gas producer’s credit spread was trading at half the current level just one and a half months ago. But with the price of oil taking another downturn, fears of further oil price deterioration straining operations further has sent investors rushing for cover. "

Wed, 02/10/2016 - 14:54 | 7166237 InsanityIsWinning
InsanityIsWinning's picture

I hate to be cynical but, oil and gas companies are public enemy numero uno, to Obama.  Now, if it were a clean energy company that would be different.  Plus, oil and gas folks are politically conservative and white, also public enemy numero uno to Obama.

Wed, 02/10/2016 - 15:04 | 7166274 taketheredpill
taketheredpill's picture

3.25%....somebody was happy when they stuffed that into their portfolio.

 

Wed, 02/10/2016 - 15:05 | 7166280 Ghost of Porky
Ghost of Porky's picture

TBTF

 

They'll be bailed out, as long as they make a significant commitment towards wind, solar, hydro, algae, fuel cell, geothermal, climate change, black lives matter, and gay marriage.

Wed, 02/10/2016 - 15:32 | 7166403 Kefeer
Kefeer's picture

If I were Russia, China, Saudi Arabia and the UAE; I would cut production now and raise the oil price and wait 2-3 months for all the western banks to lend to the energy sector like there was no tomorrow, then flood the market and bring the price down to $20 per barrel and finish the job for good.

 

Take over the world banking system by beating them at their own game.

Wed, 02/10/2016 - 16:50 | 7166849 Ajax_USB_Port_R...
Ajax_USB_Port_Repair_Service_'s picture

If I had some OPM I'd do it!

Thu, 02/11/2016 - 13:35 | 7171489 SmittyinLA
SmittyinLA's picture

Is CHK bigger than Abengoa?

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