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Chesapeake wins bond dispute with Bank of NY Mellon

Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS/Steve Sisney
Chesapeake Energy Corporation's 50 acre campus is seen in Oklahoma City, Oklahoma, on April 17, 2012. REUTERS/Steve Sisney

By Jonathan Stempel

(Reuters) - Chesapeake Energy Corp won the right to redeem $1.3 billion of notes early, as a federal judge rejected an argument by the notes' trustee, Bank of New York Mellon Corp , that the company waited too long to tell investors of its plans.

Chesapeake, the No. 2 U.S. natural gas company, said it intends to refinance the notes, and that Wednesday's decision by U.S. District Judge Paul Engelmayer in Manhattan will save it more than $100 million in interest payments.

That could ease Chesapeake's debt burden and other strains exacerbated by the lowest natural gas prices in a decade.

Engelmayer ruled that Chesapeake's March 15 notice to redeem the 6.775 percent notes, which would have matured in 2019, did not come too late.

He rejected the contention by Bank of New York Mellon that Chesapeake had missed a deadline a month earlier. The redemption price for the notes was 100 cents on the dollar plus interest.

"Chesapeake's notice was effective, not defective," and the bank's interpretation of the bond documents was "tortured and incoherent," Engelmayer wrote in a 92-page decision.

The evidence "convincingly establishes a meeting of the minds among the negotiating parties as to the deadlines," he added. "These parties intended and agreed that March 15, 2013, would serve as the deadline for Chesapeake to give notice."

PRICE OF NOTES TUMBLES

Engelmayer held a week-long trial in late April, and ruled before the scheduled May 13 redemption date.

Bank of New York Mellon spokesman Kevin Heine declined to comment on the decision, and said the bank will continue to represent bondholders' interests.

Domenic Dell'Osso, Chesapeake's chief financial officer, in a statement said he was pleased with the decision.

By early afternoon, the price of the Chesapeake notes had tumbled 7 cents on the dollar to 100.5 cents, with the yield rising to 6.67 percent from 5.27 percent, according to bond pricing service Trace.

Shares of Chesapeake rose 21 cents to $19.34 in early-afternoon trading on the New York Stock Exchange.

Investors favoring the bank's view included Archer Capital Management LP, Ares Management LLC, Aurelius Capital Management LP, Carlson Capital LP, Cetus Capital LLC, Latigo Partners LLC, Monarch Alternative Capital LP, P. Schoenfeld Asset Management LP, River Birch Capital LLC and Taconic Capital Advisors LP.

FUNDING GAP

Chesapeake has been cutting spending and focusing more on drilling its best properties after former Chief Executive Aubrey McClendon spent heavily and took on more debt to amass large acreage positions in U.S. shale basins.

The Oklahoma City-based company plans to sell as much as $7 billion of assets, but faces a $3.5 billion gap this year between estimated cash flow and capital expenses. It ended the first quarter with $13.4 billion of long-term debt.

Chesapeake also faces other legal issues.

These include probes by the U.S. Securities and Exchange Commission into a perk that gave McClendon a stake in company wells, and by the U.S. Department of Justice into possible antitrust violations over Michigan land deals.

McClendon stepped down as chief executive on April 1 and was succeeded on an interim basis by Steve Dixon.

Chesapeake's board has also been overhauled, with several directors installed by large investors, including Carl Icahn and Mason Hawkins of Southeastern Asset Management.

The case is Chesapeake Energy Corp v. Bank of New York Mellon Trust Co, U.S. District Court, Southern District of New York, No. 13-01582.

(Reporting by Jonathan Stempel in New York; Additional reporting by Anna Driver in Houston; Editing by John Wallace)

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