The "Trade Of The Year" Just Returned 30% In Two Days

It was just two days ago when we laid out what could be "the trade of the year": namely, going long Chesakeapke's $500MM 3.25% bonds of March 15, which were then trading at 80 cents on the dollar in anticipation of a Chesapeake bankruptcy, yielding a whopping 299%.

This is what we said:

... 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.

Fast forward barely 48 hours later, when we get this:

  • CHESAPEAKE SAID PLANNING TO PAY $500 MILLION DEBT DUE IN MARCH

This is what Bloomberg added:

Chesapeake Energy Corp. 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 second largest natural gas producer in the U.S. is also considering selling assets to shore up its capital so it can address more than $1 billion of debt coming due in 2017, said the person, who asked not to be named because the matter is private.

With the bonds trading as low as 55 on Monday, and at 80 cents on Tuesday, there was clearly a substantial short overhang in the name just waiting for the company to roll over and die.

Not so fast: even the mere hint that the company would make the bond payment (it may, it may not: a lot will change in the next month) has unleashed a furious short squeeze and sent the 3.25s soaring, and as the latest bond run indicates the bonds which were offered at 80 on Wednesday, are now marketed 92-94, and just traded at 93 for a yield of just over 100%.

We would hit that 92 bid, pocket the tasty 15% cash on cash bond return in 2 days, and close the trade out, which is further juiced by the 15% drop in the stock assuming one put on the equity short leg, because while the bonds have soared, the equity is down 15% since the "recommendation" for an all in return of 30%. 

And now we sit back and await for more "Top Trade Recommendations" by Goldman Sachs to do the opposite, and to generate risk-free returns for the rest of the year.