Chesapeake's AIG Moment: Energy Giant Faces $1 Billion In Collateral Calls

Tyler Durden's picture

Back on February 10, when looking at Carl Icahn's darling Chesapeake, whose stock had plunged to effectively record lows on imminent bankruptcy concerns, we said that for anyone brave enough to take the plunge, the "Trade of the Year" would be to go long a specific bond, the $500 million in 3.25s of March 2016 which were maturing in just over a month, and which on February 10 were yielding 300% at a price of 80.5 cents on the dollar.

And then, just two days later, in an unexpected turn, Chesapeake announced that contrary to public opinion, the troubled energy giant "is planning to pay $500 million of debt maturing in March, using a combination of cash on hand and other liquidity that may include its credit line, according to a person with knowledge of the matter." The issue referenced was precisely the bond that was our "trade of the year."

To be sure, the bond promptly surged, even as the stock priced tumbled, on what was seen as a very bondholder-friendly action (and thus to the detriment of shareholders) and hit a price of 95 cents while the stock tumbled by 15%, generating a 30% return for anyone who had decided to go along. At that moment we urged anyone in the trade to take their profits and go home, taking a few weeks, or the rest of 2016, off.

A quick update since then shows that those same bonds are currently trading effectively at par (99.25 cents)...

... suggesting that the risk of a near-term Chesapeake bankruptcy may be gone for now.

But is it truly off the table?

Sadly, we think that despite the brief hiccup in optimism, CHK's troubles are about to get worse, even if this particular bond is ultimately repaid, for one simple reason: in its 10-K filed yesterday, Chesapeake announced that it has just reached its own "AIG moment."

Recall that one of the reasons for AIG's unprecedented, and rapid collapse, was a series of collateral calls resulting from a series of downgrades of the insurer, which forced it to post increasing amounts of collateral to which it had no access, and which in turn activated a liquidity death spiral which ultimately culminated with its bailout by the US Treasury.

The same is now taking place at Chesapeake, as the company's 10-K has just confirmed:

Since December 2015, Moody’s Investor Services, Inc. has lowered the Company’s senior unsecured credit rating from “Ba3” to “Caa3”, and Standard & Poor’s Rating Services has lowered the Company’s senior unsecured credit rating from “BB-” to “CC”. The downgrades were primarily a result of the effect of low oil and natural gas prices on our ability to generate cash flow from operations. We cannot provide assurance that our credit ratings will not be further reduced if commodity prices continue to remain low. Any further downgrade to our credit ratings could negatively impact our availability and cost of capital.


Some of our counterparties have requested or required us to post collateral as financial assurance of our performance under certain contractual arrangements, such as transportation, gathering, processing and hedging agreements. As of February 24, 2016, we have received requests to post approximately $220 million in collateral, of which we have posted approximately $92 million. We have posted the required collateral, primarily in the form of letters of credit and cash, or are otherwise complying with these contractual requests for collateral. We may be requested or required by other counterparties to post additional collateral in an aggregate amount of approximately $698 million (excluding the supersedeas bond with respect to the 2019 Notes litigation discussed in Note 3 of the notes to our consolidated financial statements included in Item 8 of this report), which may be in the form of additional letters of credit, cash or other acceptable collateral. Any posting of collateral consisting of cash or letters of credit, which would reduce availability under our credit facility, will negatively impact our liquidity.

With this warning, energy giant Chesapeake has effectively warned that it may be the the energy-collapse's AIG: a company which was teetering on the edge, until the rating agencies came along and with their downgrades, sprung an ever escalating series of collateral calls.

Furthermore, we now know roughly what the company's liquidity state is: it has so far been able to post collateral on less than half, or $92 million, of its total inbound collateral calls amounting to $220 million. Worse, the company may at any moment face up to an additional $698 million or just under $1 billion in collateral calls.

Putting this in context, it took an unprecedented scramble by CHK in the last few weeks to free up precious liquidity and sell assets to just make the upcoming $500 million bond payment. In the meantime, CHK is already facing a collateral  defficiency of $128 million, one which can grow by $698 million, or more in the coming weeks, if further credit downgrades materialize.

And, adding insult to injury, is that the price of nat gas, Chesapeake's bread and butter, just hit a 16 year low which suggests even greater cash burn for the company.


All of which explains our eagerness to get out of the "trade of the year" when we had the chance. Because considering these latest developments and this surge in collateral calls, if we had to speculate what the next direction for the company's asset prices would be, the answer - absent a dramatic surge in the price of nat gas - is sharply lower.

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cheka's picture

controlled demolition of jr oilers

hedgeless_horseman's picture



To be sure, the bond promptly surged, even as the stock priced tumbled, on what was seen as a very bondholder-friendly action (and thus to the detriment of shareholders) and hit a price of 95 cents while the stock tumbled by 15%, generating a 30% return for anyone who had decided to go along.

These Hi-Lo Omaha games can get so excting! 

Often times, one doesn't know until the last card if one has dog shit, or owns half, or all, of the pot.

Throw a rating-agency wild card in there, and it all gets really stupid, fast.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) hedgeless_horseman Feb 26, 2016 3:58 PM

Oh great... More FEE SIMPLE 'ownership' (of infrastructure) coming from jew bankers who, at 'zero risk', printed money out of thin air which eventually became ownership  based on a corrupt paper legal system, controlled & operated mostly, by the same jews...

cheka's picture

the toxic paper will find its final resting place at frbny


bought from other nyc entities at 2x to 10x market value

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) hedgeless_horseman Feb 26, 2016 3:59 PM

Can some enlightened person... PLEASE... come on here & explain to me the ERROR in my thinking so I can spare you all this blasphemy?

hongdo's picture

I want to know too.  If I deposit $10 in a bank and then they loan out $100 to buy a house and then the borrower defaults and the bank gets the house and sells it for $100 and then pays me my $10 back - what happens to the $90?

What am I missing?

lincolnsteffens's picture

Ahhh....doesn't exactly work that way. It rhymes but your missing a bit in between. It starts with a progression. You deposit 10 bucks and your bank lends out 9. The guy that borrowed the 9 deposits it in his bank and his bank loans out 8.10 etc.

Of course the bank is guilty of fraud for the crime of conversion though a fraudulent contract which they call a "LOAN". You gave the bank YOUR asset (future labor -  your signature represents your value ) which it entered into their accounts as a +. It then cuts a check to you for 90% of the asset you gave to the bank. Every time you make a bank payment they put a minus value to offset your deposited value. When you use Federal Reserve Notes or currency to give to the bank for their "LOAN", you gave the bank a negative value.

The bank did not loan you or anyone the bank's or their customer's credit/money. Therefor you were defrauded into thinking you borrowed something from the bank when the bank in fact took something of value from you but pretended they gave you something of value they called a "LOAN". You are the value.

hongdo's picture

OK let me see.  If I "borrow" $100 I am actually giving the bank an asset of $120 (supposing $20 interest over the life of the loan).  They then give me $100 of this newly created asset as the "loan".  At this point the bank has a $120 asset.  As I "pay off" the loan I am actually decreasing the bank asset. 

It seems to me that if I never paid the bank back they would still have an asset.  But if they had to admit they were never getting paid back, they would have to zero out the asset.  But it didn't cost them anything to start with so they do not lose anything?

I really would like to understand this but it seems to elude me.

WillyGroper's picture

Gee, wonder who'll scoop 'em up?

Genie international?

Who's on the BOD?

WildAss guess anyone?

NoDebt's picture

The creeping death of insolvency.  That's what you get for fucking up in an industry that isn't banking.


Bay of Pigs's picture

Edging closer to the abyss...

pods's picture

I doubt Cheasapeake has the needed lamb's blood to paint on their door either.

NotApplicable's picture

I'd say that's what they get for being in an industry fucked up by banking.

Question is, are there any unfucked industries left? Or is it endgame time?

scubapro's picture


calling kevin henry, calling kevin henry.....please hold above spx 1940, and give the nasdaq of boost, if you could.  nice work on the Dow!


all eyes glued to avoiding a Jan + Feb back to back monthly decliners.....historically unkind to equities on an annual basis...

Hohum's picture

Just refinance already!  It's the American Way!

undertow1141's picture

UH-oh new wrinkle to the old system. The banks won't give them another loan. The refinace game only lasts so long apparently.

Kaiser Sousa's picture

everything is great.

now shut up and buy some stawks.

Peak Finance's picture

Made 37%, 62%, and 77% on three CHK trades via OTM calls.

Maybe CHK drops on this news then buy back in on Tuesday. 

Four chan's picture

no doubt, this has been a great options trade for me too.

GRDguy's picture

Don't forget that Goldman-Sachs help cause the 2008 collapse by demanding more collateral from a couple of small funds.  Kinda like a bank asking for your paid-for motorcyle to be added as collateral to your up-to-date car loan, or they'll call repo man.

SpasticGramps's picture

Fuck you Aubrey!

I always hated working for those cunts anyway. Their engineers didn't know dick about drilling and would never pay for damages for tearing up directional drilling equipment. Equipment they broke because they are a bunch of ass clowns who think they can drill holes in the ground, but can't.

Soul Glow's picture

Napoleon give me some of your tots!

Secret Weapon's picture

Had to upvote you for a Dynamite comment.

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Feb 26, 2016 3:44 PM

Is there any way that you can package those collateral calls into securities and sell them to investors?  I'm sure with some creative thinking we can kick this can further

booboo's picture

They already have a pipeline for that, it's called a Public Pension Fund.

vincent's picture

Would "Oh, Fuck" be an appropriate response?

JohnGaltsChild's picture

Crap. My Utica lease is up for renewal in June.................anyone know XTO's phone number????

Squid Viscous's picture

maybe they can re-sell the naming rights of the hoops arena to Suckerburglar?

Facefuck Arena?

Omen IV's picture

why would you use precious liquidity for bond payment when operating continuity depends on market access for transportation / various services - with take or pay for pipeline access is critical ?


why wouldnt they let a default occur on the bonds and continue operations unless the have DIP financing lined up and need certain approvals

oobilly's picture

MFGlobal mightve been able to help/

Die Weiße Rose's picture

In a further bid to save money, Chesapeake is drastically cutting its average operated rig count.

In 2014, it operated an average of 67 rigs. In 2015, that number was slashed to 14.

For 2016, Chesapeake plans to operate four-to-seven rigs. ( 4 to 7 rigs ??)


In total, Chesapeake plans to reduce its 2016 capital expenditure budget by 57% over last year, to $1.3-to-$1.8 billion.

The company, based in oil-rich Oklahoma, also announced that it plans to raise as much as $1 billion in cash in 2016

by selling off non-essential assets in a handful of small transactions.


Since the end of 2015, the company has already closed or undersigned an additional $700 million in asset sales agreements.

Although the troubled Chesapeake has good intentions about paying off its debt and continuing to avoid bankruptcy,

the amount is so large that it will require even more drastic measures -- or even more drastic increases in energy prices -

- to make much of a difference.


Despite occasional false dawns, this stock is among a group of doomed equities that are poised to collapse.

At this point, any investment in Chesapeake is a wager that oil and gas prices will rise in the near term.

Even if energy prices improve in the long term, Chesapeake might not be around to benefit from it.


In 2015, Chesapeake wrote down the value of its oil and gas field, losing the company more than $14 billion.

Plummeting prices for its products have made Chesapeake's fields simply not worth drilling.

The average realized price for natural gas from Chesapeake fell 34% in the fourth-quarter year over year.

And natural gas now makes up 74% of the company's total production, up from 70% in 2014.

Chesapeake posted a loss of $2.23 billion for the fourth quarter, whereas in the same quarter of 2014 it had reaped a $586 million profit.


The company also announced a per-share loss of $3.36, versus an 81-cent-per-share loss in the fourth quarter last year.

 But there were shreds of better-than-expected (rather than good) news from this toxic company -- enough to give the stock today's price boost.


Analysts had expected a revenue drop of nearly 54%, from $5.69 billion to $2.63 billion. Instead, revenue fell only a hair over 53%, to $2.65 billion.

Chesapeake also announced that it had reduced its massive pile of debt from $11.8 billion in December 2014 to $9.7 billion.


The company plans to continue chipping away (on 4 to 7 rigs ??) at its debt this year  , announcing in January that it is suspending its preferred-share dividends.

Chesapeake expects this decision to save its business $170 million annually.

With a massive amount of debt hanging over the company's head, despite cost-saving and cutting measures, the company could go belly up any day now.


CHoward's picture

Some win...some lose.  Bankruptcy is calling.