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.