Redeeming senior notes too early and without adequate notice cost Chesapeake Energy Corp. dearly after it was ordered on Friday to pay almost $380 million for improperly redeeming $1.3 billion in bonds.
U.S. District Judge Paul Engelmayer of the Southern District of New York in Manhattan ordered the "make-whole" payment of $379.7 million to bondholders led by Bank of New York Mellon Corp. (BNY Mellon).
As Chesapeake came under increasing scrutiny in early 2012 over various financial transactions conducted under former CEO Aubrey McClendon, in February 2012, the company issued the senior notes due on March 15, 2019 bearing an interest rate of 6.775%. One year later, on Feb. 20, 2013, Chesapeake said it would redeem the notes at the special early redemption price of 100% of the principal amount plus interest. BNY Mellon, however, notified Chesapeake that in its view, the time to give notice of redemption at the special price had expired.
Chesapeake was required under terms of the agreement to give 30 days notice within the special early redemption period, which ended March 15, 2013 -- less than 30 days before it planned to redeem the bonds.
BNY Mellon filed a lawsuit, and Chesapeake moved for emergency relief. The district court agreed with Chesapeake, but on appeal, the U.S. Court of Appeals for the Second Circuit in New York City last November ruled that Chesapeake failed to issue enough notice in the case Chesapeake Energy Corp. v. The Bank of New York Mellon Trust Co. [13-cv-01582].
Chesapeake and BNY Mellon agreed that given the appeals court's ruling, the 2019 noteholders were entitled to be paid additional money. However, the parties failed to come to an agreement. The court intervened and heard arguments from both sides.
"Both parties have ably litigated the remedy issue presented by the unusual series of events here," wrote Engelmayer. "However, when viewed in light of the...principles, BNY Mellon's argument for recovery measured by make-whole damages...is substantially the more persuasive..."