Why Corporate Balance Sheets Just Don't Matter In The New ZIRP Normal

Tyler Durden's picture

By now everyone knows that Chesapeake is a slow motion trainwreck: whether it is internal management issues, which eventually will culminate with the long overdue termination of the company's head (something the company had much control over and could avoid, but didn't, and should result in the sacking of the entire board for gross negligence), or plunging gas prices (something it had far less control over, but could have hedged properly, yet didn't), what is absolutely certain is that the firm's cash flow just isn't what it used to be. In fact, according to some, it is quite, quite negative. What, however, people do not know is that under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant. We said this a month ago when we cautioned, precisely about Chesapeake, that "to all those scrambling to short the company: beware. CHK has a history of being able to fund itself with HY bonds and other unsecured debt come hell or high water. If and when the stock tanks, the short interest will surge on expectations of a funding shortfall. Alas, courtesy of the Fed's malevolent capital misallocation enabling, we are more than confident that the firm will be able to issue as much HY debt (unsustainably at 10%+, but that is irrelevant for the short-term) as it needs, crushing all short theses. What this means, simply, is that anyone who believes traditional fundamental analysis will and should work in the CHK case is likely to get burned." Sure enough, we were again proven right: Chesapeake just announced, following today's epic drubbing, that it is refinancing its secured debt facility (with its numerous restrictive covenants) with $3 billion in brand new Libor+7.00% unsecured paper (courtesy of Goldman and Jefferies). In doing so, CHK just got at least a one year reprieve.

The full just released PR:

Chesapeake Energy Corporation Enhances Financial Flexibility with $3.0 Billion Unsecured Loan to Be Repaid from 2012 Asset Sales


Chesapeake Energy Corporation (NYSE:CHK - News) today announced it has entered into a $3.0 billion unsecured loan from Goldman Sachs Bank USA and affiliates of Jefferies Group, Inc. The net proceeds of the loan, after payment of customary fees and original issue discount (if any), will be utilized to repay borrowings under the company’s existing corporate revolving credit facility.


The new facility, which ranks pari passu to Chesapeake’s outstanding senior notes, matures on December 2, 2017 and may be repaid at any time this year without penalty at par value and carries an initial variable annual interest rate through December 31, 2012 of LIBOR plus 7.0%, which is currently 8.5%, given the 1.5% LIBOR floor in the loan agreement. During the remainder of the year, Chesapeake plans to complete asset sales totaling $9.0-$11.5 billion and intends to use a portion of the proceeds from these asset sales to repay the loan. Chesapeake has received strong interest from prospective buyers of its Permian Basin asset sales process and its Mississippi Lime joint venture process, and the company expects to complete these two transactions in the 2012 third quarter.


Management Comments


Aubrey K. McClendon, Chairman and Chief Executive Officer, said, “This short-term loan from Goldman and Jefferies provides us with significant additional financial flexibility as we execute our asset sales during the remainder of 2012.


As previously announced, Chesapeake’s business strategy is evolving in 2012 from the unconventional resource play identification and leasehold capture strategy of the past seven years to a strategy now focused exclusively on developing the 10 core plays in which we have built a #1 or #2 position and on continuing our transition from natural gas to liquids, reducing capital expenditures and paying down long-term debt. We believe Chesapeake has built the nation’s best collection of E&P assets, and we are 100% committed to delivering on the very substantial growth and value embedded in these assets for our shareholders through a relentless focus on developing our 10 core plays.”

Reading between the lines, what just happened, is that the Fed, due to its policy of destroying the cost of capital as an indicator of corporate health, forced lenders to agree to less protections in exchange for preserving a comparable cash interest stream from Chesapeake. What it also did, is allow CHK to engage in even more stupid behavior as the elimination of secured creditors as a class, means the company will no longer have to preserve EBITDA and Free Cash Flow over a certain level, nor will it have to engage in prudent hedging.

The end result of course is that CHK will merely do more of the same kind of stupidity that dragged its stock down to 1 year lows today, but not before another vicious snapback as shorts expecting a prompt burial, will be forced to cover. In the meantime, the firm will engage in even more equity destroying behavior, until one day it no longer can refi its debt (maybe they can get some pointers from Europe on how to deplete the collateral value of their assets in record time). But that will happen after some time: first it will refi all its HY bonds with in kind bonds having a longer maturity but higher interest, until little by little the entire estate if bled dry of all asset value and is paid out in the form of interest expense to the firm's creditors.

It also means that since the firm will preserve its inefficient production profile, much more natgas than equilibrium will be pumped out of the ground, pressuring the overall natgas price lower, for longer, than in a normal world, free of ZIRP... and of Bernanke.

Then, when the CHK bankruptcy finally does come, it will be straight to Chapter 7, do not pass 11, full blown liquidation, and zero recoveries for anyone as there will be absolutely no salvageable asset value left in this shell of a companies that was just "Greeced" for the benefit of its creditors. Finally, do not be surprised to see Goldman and Jefferies refi the firm's entire balance sheet - all that means is that the two investment banks are progressively stealing more and more value from equity, until one day, inevitable, they are also the DIP lenders.

Thank you Fed.

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vast-dom's picture

I've been commenting for well over a year here that funduhmentals have become absolutely irrelevant. Which is scary for obvious reasons....

Cdad's picture

Not scary at all.  Look, just get yourself a super computer and set it up in the room next to where Duncan Niederauer takes his afternoon dump [when he is not otherwise pimping absolute crap Chinese IPOs].  After that, set up an RS feed from the Fed.  Then just start front running everything, especially when everything turns out to be nothing...like today's session, in fact.

You'll be on your way to millionaire status in no time which will, apparently, cause you to regularly take pictures of your dinner table and twitpic the picture to the world, for some odd and unknown reason.  You will also be able to lay claim to being smarter than everyone around you even as you say incredibly stupid things on television because...well, because other people are also saying those same things.

Fair warning, however, you will also likely be prone to running and plunging off of cliffs without really knowing what you are doing, not unlike how snipe run into a paper bag where a flashlight beam is being pointed.  Also, you will have an affinity for shiny bobbles, even if said bobbles are directly in the path of moving buses and trucks.

Unless, of course, you like spending your time digging through the details to figure out the facts about a company.  Pffffft.   

Good luck, future little urban achiever.  

Yen Cross's picture

I have a lot of respect for you" Cdad". I wrote your comment down. I'll break the post down as well.

  Attitude adjustments, on my behalf, are welcome.

slewie the pi-rat's picture

hey, Y/C!  xlnt!

i move that we rename this piece tyler'sOligarchianRhapsody

hoist the jib!

Yen Cross's picture

Where in the heck have you been? Shit Slewie ! 

  I told ya I'm  "Singapore"!

Pure Evil's picture

Wow, a whole new and improved dimension into corporate raiding. Not only is the enemy a fifth column at the highest level of the corporate executive structure, but they get to collect bonuses while they keep the fire burning using Goldman and Jefferies accelerant.

If they're lucky they can slowly constrict CHK until every drop of blood is squeezed from that stone.

Oh regional Indian's picture

Excellent stuff CDiddy!


ToNYC's picture

ZIRP asset dis-covery is the Goldman and myrmidon sequel to "Invasion of the Body Snatchers". Aubrey McClendon is no Kevin McCarthy but the pods are filling the asset trunks of USA with the backtested-to-nofuture BurnedHanky.

Hulk's picture

ZIRP == Keynsian endgame. The financial system is blinfolded, its interest rates tied behind its back and is at the end of the plank, of a sinking ship...

Gloomygus's picture

Off topic entirely, but an entirely important topic - really the very most important topic of all:

Family photos - note the striking family resemblance.  It's an amazingly strong blood line.  If only we had such royalty here in the US we would not have so many problems.  Is there anyone we could nominate to just be King?





Western's picture

Are you joking? How do the kings/queens of Siam at all resemble something we want in north america? I don't need or want a monarch.

I should be working's picture

All I have to say is stay away from companies who buyback shares to meet EPS targets and finance it with debt. Growth fades, debt lasts forever...

Oh regional Indian's picture

"Growth fades, debt lasts forever..."

A quotable Quote...well said.


I should be working's picture

I was thinking specificallly of companies like: AZO, CHK, PM and TPX.  

They have become Frankenmonsters with negative shareholder equity (who knows what the equity of CHK is??).

For example, did TPX stock collapse by 50% last week because they failed to raise guidence?  Or is it because the hedge funds that ran the price through the roof understand that with negative shareholder equity, TPX can no longer finance buybacks by mortgaging it's future.

But, S&P rated TPX a strong buy, PM is a strong buy, Goldman told the muppets AZO is a strong buy.  A week ago the 'intellegent investor' in the WSJ recommended CHK, are you kidding me??

Analysts clearly do not care about shareholder equity, but if you are meeting a Wall St. CAGR estimate by increasing you debt burden how sustainable is that?  Although I have to admit, if you can find a company in the early stages of it destroying it's balance sheet to buy back shares you can make good money.  How do you think Eddie Lampert got so rich.  Anyone want to buy SHLD? They are in the early stages of destroying their stockholder equity.  21B in assets down from 28B 5 years ago with a reduction of their sharecount of 40%.

I'm sure Sears can solve all it's problems by buying back shares and selling debt to do it.

But Tyler is right, I would never short any of these companies, it is impossible to know how long until you run out of road.  And it's like stall speed on a plane, if you grow faster than your debt you take off and never run out of road.  I guess if you don't everyone who bought those BBB rated 3.75% bonds gets screwed, along with your shareholders...

Gloomygus's picture

When the media is 98% captive, and when we are 98% captive, we resort to blogs. Thank the Lord for Zerohedge. Now nominate a King.

Umh's picture

Would you like to be King for a day?

Gloomygus's picture

I'll dispense with the double-speak - does this man look like our President - does this man's parents look like they might be our President's parents:


Look at at them - they are the world's richest monarchy. Our President acknowledges schooling in Indonesia, which is immediately below Thailand. The very noise that is generated in response to me is confirming. Look at these people in wonder and sorrow:


Now read the wikileaks data on our state department and Thailand.

Disclaimer: all of the foregoing is speculative political speech expressed by a United States citizen, protected under the 1st amendment of the United States Constitution. These political opinions are being expressed inside the United States, specifically in Wisconsin.

Gloomygus's picture

Additonally, the man in the photos, the crown prince of Thailand, has a father who was elevated to the crown after his elder brother was shot in England - the last man to see the Decedent alive was the current King of Thailand. I feel my initial satire could only have been wilfully misinterpretted by those intent on obfuscation.

Obviously I am the last person in this country who wants a King like Thailand's, and I say we're painfully close to already having one.

lizzy36's picture

Mispriced risk = horrible capital allocation.

In a normal capitalist system, a company like CHK, would be forced into Chapter 11. Consequences for its horrible financial mismangement. The Board of Directors, would all be held liable for gross neglience, and breach of fiduciary duty. And LESSONS would be learned.

Instead under this POS central planning, Companies like CHK get $3B of unsecured lifeline. Brilliant.

disabledvet's picture

you and the TD's assume "control" where no control exists. What should be pointed out is the classic "my trade was spot on until i was forced to exit" claptrap. In other words "we got big sharks in this Ocean" and "how common is it for a CEO (or an average everyday trader of course) to be played like he was a Stradavarius." And of course "that is our weakness." ALL of our weaknesses actually. "we really believe" don't we? But only God can tell us "if we are right or wrong" yes, yes? We have no control over such things...

Xkwisetly Paneful's picture

Gamblers fallacy?

If only I had done this instead of that somehow I could beat the house.

Also hysterical.

lizzy36's picture

That is exactly the problem with ZIRP....it creates gamblers (with the houses money in many cases) instead of investors.

Why average investors are fleeing the equity markets en masse.

Oh regional Indian's picture

One read of Antal Fekete and the Knife-edge of falling interest rates and it's clear why ZIRP was a Shigawire on the world economy's neck. Intended, brutal and is clearly having the intended consequences.


slewie the pi-rat's picture

slewie had been saying that one of the intended consequences of FED policies is to finance theTreasury

the checks will be in the mail

lizzy36's picture

I can't speak to what TD thinks.

I can speak to what I think.

I don't believe God tells us anything, specifically if we are right or wrong. I assume religions (all) indoctrinate us to believe that crap, so we end up as sheeple. I also believe that religion is generally the way the elites control the masses, by keeping them divided based on religious affliation.

As to control....in this world, Bernanke is far more powerful than some abstract notion of god. Bernanke knows exactly what he is trying to do with ZIRP and successive QE's. Force everyone out the risk curve and try to create "wealth effect" and hope it trickles down. The completly foreseeable consequences to ZIRP is everyone taking on more and more risky credit in an attempt to reach for yield. Mispricing of credit risk occurs, when credit has ZERO risk, like in a ZIRP enviroment. 

JPM got played like a "Stradavarius" by a number of Hedge Funds in the past month. Completely forseeable given that once a "whales" positions are exposed, they will be attacked. As Jamie Dimon said yesterday if there was one thing he should of being doing in the past month it was reading newspapers (they had the story of what was going on, not JPM's internal risk people).

I have been saying for the last 6 months, once natural gas started its descent, CHK was a disaster in the making. I was told over and over again by people much smarter than myself that it was but CHK would get last far longer than i expected because of ZIRP. Because banks/insitutional investors are looking for 8% and they don't care if it comes unsecured on a balance sheet that is 3x LTD/EBITDA. 

There are perfectly known consequences of mispriced risk and interest rates that are held to low for too long. We have seen those consequences again and again in the last 12 years. You can choose to believe that we have "no control" or you can choose to believe that the one thing we absolutely can control is out reaction to the enviroment we find ourselves in. 

NewThor's picture

Your avatar is HOT.

Is that really you?

Hulk's picture

That information will cost you a nickel...

NewThor's picture

The doctor is in, aye Dr. Banner?

Buckaroo Banzai's picture

Religion didn't turn people into sheep, genetics did. The Sumerian word for people is "Lu Lu" which transliterates into "Sheep Sheep".

Based on this insight into the sheeply nature of humans, the Sumerians created a control system called the Mystery School (which the Egyptians perfected). This control system is symbolized by the pyramid, for reasons which should become obvious upon reflection. It's still the way humans are controlled today...not that one person in a million can discern it, of course. Masons, Illuminati, and organizations like the Russell Trust Association are the modern descendants of the ancient priesthoods.

The old ways are the best ways.

bahaar's picture

So that's were the name Lululemon comes from.  I always wondered at the company's success.  'Sheep (to whom) we sell lemon'.  Interesting.

StychoKiller's picture

"Have Fun at Work", ISBN 0-937063-05-3, by William L. Livingston, F.E.S. Books

Explains the pyramid much better than you.

Psyman's picture

Over 90% of humans believe in some kind of mysticism based belief system.


'Nuff said.  Over 90% of humans are so stupid that they believe all of existence is ruled by some invisible monster in the sky.


This includes over 90% of Zero Hedge readers.  They may talk a good game, but at the end of the day they are a bunch of fucking retards.

BeetleBailey's picture

....and your 90% comes from.....?

Calling 90% of ZH readers "fucking retards" is retarded.

I suppose you think of yourself as the "other 10%". I doubt you fit into any elite category.

Oh regional Indian's picture

"Well" said Lizzy.

Now the thing is, who will be sitting with their hands in the till when NatGas finally  finds it's "real" value. 


francis_sawyer's picture


is that like?


slewie the pi-rat's picture

have you been cloned too, now, _sawyer?

Sequitur's picture

What's wrong with debt?

- John Corzine

Xkwisetly Paneful's picture

Hedged properly?

Whoa! Hedging bad that is speculation.

Bastards how dare they flood the market with cheap gas!

Note ZB praying for higher relative commodity prices now leads to the promotion of higher energy prices.

But woe are the people.

GMAFBA you are in the 1% and now openly promoting  the destruction of the poor and middle class via the same means the ultrarich have been using for quite a while.

Tyler Durden's picture

Did you even pretend to read the article? The "low" gas prices are precisely the same artifact of central planning that will lead to gas prices at the pump soaring to $6 when QE 4 is announced. As for low prices, why sure, excess supply will lead to $0.00 nat gas, at which point the entire supply side will go bankrupt, and gas will go from $0.00 to infinity.

It is precisely this myopia, that promotes short-term benefits at the expense of long-term pain, that all those advocating central planning exhibit day in and day out.

And when the day comes to pay for the "short-term benefits"... why it is someone else who will pay for that.

Xkwisetly Paneful's picture


they would be significantly lower in price without the money spewing,

so the high prices are directly the result of the central planning committee.

Without the money printing all the commodities would be priced at what they cost to get out of the ground plus a modest profit.

So the premise is false to start with they are artificially overpriced not underpriced.


As far as the rest, misallocated capital is a byproduct of the bubble economy,

central planning committee or not. The bubble economy insures lesser likely to succeed ideas get funding from time to time and since mankind does not advance in a straight line as in no one can dictate what should get funding and shouldn't the bubble economy is generally preferred.

The key is to ignore the benefits like being the first nation ever to have a "poverty stricken" underclass that are obese and own homes and cars and to focus on the Ivy league flunky who conned the game out of billions.

the only people paying beyond the inflation tax so far are the people paying 99.98% tax on interest income to the tune of trillions in lost earned interest.

Besides the entire problem are the hundreds of trillions in unfunded social obligations,

not the banks, not the current crop of central planners, not the military and yet never once actually saw a piece here detailing such.

Face it the perpetual promotion of the commodities is exactly the position of the ultra wealthy as usual using the government to bury the poor and middle class.

lizzy36's picture

Just an FYI....CHK is NATURAL GAS....the ONLY commodity that actually trades supply and demand because of the way it is stored.

So when you start spewing crap about commodities in general.....it DOESN'T APPLY TO NATURAL GAS.

So now go back and read the post again. Attempt to understand that natural gas has hit MULTI-DECADE lows, due to oversuppply which is not being curtailed, as it normally would be, in a NON central planned economy. 

A company like CHK wouldn't be able to drill and flood the market with unprofitable natural gas, if they couldn't get these UNSECURED loans. 

The decades low natural gas price is as much a by-product of ZIRP and QE as $100 oil. The cause us exactly the same, the effect is different.

Cdad's picture

Agreed, lizzy.  Ah, but a fickle Fed shall decide for us all...so hold tight to your news feed and "invest" as the great Oz tells you to "invest."

Xkwisetly Paneful's picture

Not true.

Before the plummet gas prices continued escalating despite dropping demand and constant supply.

Without any of that speculation the producers would have received lower proceeds in every commodity, gas included. Which would mean less extraction which follows the same train and results in the same place. 

lizzy36's picture

So the massive discovery of shale gas reserves in the US (estimates of natural gas reserves doubled in the US between 2006 and 2011)  coupled with the massive advances in fracking and horizontal drilling had nothing to do with plummeting nat gas prices.

Good to know.

Can you explain to me like i am a child how speculation affected the price that a NATURAL GAS producer recieved for his/her product?

Further can you explain to me how if your theory is correct that absent speculation, prices would have been lower and thus caused LOWER nat gas production. Because we hit multi-decade lows 3 weeks ago, and yet nat gas production for the first 4 months of 2012 is higher than it has ever been.

Xkwisetly Paneful's picture

Ad Hom like a pro.

Hardly see a mention of the new discoveries in your first post, only something about ZIRP related drilling causing unabated oversupply as if the new discoveries alone would not have resulted in oversupply and depressed prices.

My theory is correct, money spewing went everywhere including into NAT GAS.

The result is more gas all else equal regardless.

Now try not to spin until your head falls off. 





piliage's picture

Let me focus this discussion a bit.

Cheap money = funds to drill and transport

No cheap money = no funds to drill and transport

The money isn't going into commodities futures, it is buying actual pipes, trucks, rigs, to drill and transport shale gas.

More money = more supply = lower prices.

When inflation comes back (which it will when the Chinese have no more money to spend on cheap US debt), the cheap money to drill and oversupply stops and a bunch of companies living off 0% money go bust as they can't pay the costs of operation.

Where I disagree with a few on this website is that BP, Exon, Shell, GE, and other will then swoop in, buy the things cheap, and cut back on supply and gas will come back to a sustainable price.


Matt's picture

there was no ad hom.

She wasn't calling you a child, she was asking you to explain your position as if you were explaining it to a child. 

What causes bubbles, if not malinvestment due to central planners giving away cheap money?

Whether it is the federal government paying bonuses for each mile of railway track laid, or whether it is the Federal Reserve giving away (virtually) free money, both are centrally planned and both cause bubbles.

How can a bubble occur without cheap money to speculate with?

Atomizer's picture



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