Missed it by that Much
In May 2013, Chesapeake Energy Corp (CHK), the second largest U.S. natural gas company, won a case in the U.S. District Court for the Southern District of New York that lifted US$117 million from event-driven noteholders’ pockets when the price crashed, but as of the appeals court decision two weeks ago, now looks less certain of the outcome relating to the US$400 million make-whole premium in dispute. Noteholders represented by the trustee reportedly 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.
In April 2013, noteholders had bid up the price of CHK’s US$1.3 billion of 6.775% notes due 2019 to a price of 109.5 in anticipation of winning a suit against CHK to claw the US$400 million make-whole premium they believed CHK owed them for calling the notes due 2019 for early redemption. (By way of background information, high yield notes are often issued with a curiously named “no call” period, during which the notes can in fact be repaid, but usually upon payment of a “make whole premium” that represents the net present value of interest payments that will become due on the notes up until the “first call date” (also curiously named, but it is market convention)). CHK’s notes due 2019 had a bespoke provision that would allow CHK to call the notes due 2019 for early redemption during a specified time frame upon the completion of specific asset sales, but at the special price of par and without the necessity of paying the make whole premium. CHK expected to save about US$100 million in interest payments by early refinancing of the notes due 2019. At issue was the boilerplate language about the timing of the notice for redemption, and during which time the redemption must be completed in order to qualify for the special price of par without the make-whole premium. Conventionally, a notice of redemption is required to be sent to noteholders at least 30 days prior to redemption, but not more than 60 days prior to redemption. Having completed the asset sales, CHK issued its redemption notice prior to the deadline for taking advantage of the special price — but crucially it did not complete the redemption until after the deadline. CHK argued that the indenture (the contract governing the notes) was ambiguous about whether the redemption needed to be completed prior to the deadline, or merely notified to the noteholders prior to the deadline.
On 25 November, the U.S. Court of Appeals for the Second Circuit reversed the lower court’s decision, concluding that, under the unambiguous terms of the indenture, the notice was not timely to redeem the notes due 2019 at the special price, as such a redemption needed to be concluded no later than 15 March, 2013, with 30 to 60 days’ prior notice. CHK sent the redemption notice on 20 February, 2013, leaving insufficient time to redeem the notes due 2019 prior to 15 March, 2013. The appeals court remanded the case to the lower court to determine if the notice would otherwise be effective under the indenture. CHK is weighing its options — and probably other things as well.
Was the indenture ambiguous? Here is the relevant language: “At any time from and including November 15, 2012 to and including March 15, 2013 (the “Special Early Redemption Period”), the Company, at its option, may redeem the Notes in whole or from time to time in part for a price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest on the Notes to be redeemed to the date of redemption; provided, however, that, immediately following any redemption of the Notes in part (and not in whole) pursuant to this Section 1.7(b), at least $250 million aggregate principal amount of the Notes remains outstanding. The Company shall be permitted to exercise its option to redeem the Notes pursuant to this Section 1.7 so long as it gives the notice of redemption pursuant to Section 3.04 of the Base Indenture during the Special Early Redemption Period.”
The appeals court stated, “under New York law, a contract is ambiguous if its terms ‘could suggest more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.'”, citing Law Debenture Trust Co. of N.Y. v. Maverick Tube Corp., 595 F.3d 458, 466 (2d Cir. 2010) (internal quotation marks omitted). The appeals court also noted, “when the terms of a written contract are clear and unambiguous, the intent of the parties must be found within the four corners of the contract . . .” Howard v. Howard, 740 N.Y.S.2d 71, 71 (2d Dep’t 2002) (citations omitted). The appeals court noted that the indenture was unambiguous about the exact time frame that a special redemption could take place.
The appeals court was succinct in stating that a court looks to (1) the plain meaning, (2) in its context in the entire document, and (3) in light of customary usage (in this case, in indentures). In the course of drafting and negotiation of indentures, there are times when, at turns, fanciful or pained interpretations are proffered, or times, “with the morning cool, repentance came”, and one party or another desperately wants to turn back the hands of time, un-imbibe the previous evening’s folly, and find an interpretation that can only be reached by straining the sinews of syntax. We (the lawyers) are often asked whether a provision or clause means “this” or “that”, and in the case of actual ambiguity, neither “this” nor “that” can be certain as the court will then look to the intent of the parties, and often there is no certain evidence what either party intended. There was one dissenting judge on the panel at the appeals court, who said that more scrutiny was needed as to CHK’s intent in drafting the document.
CHK recorded a US$33 million loss in connection with the May 2013 refinancing, and will certainly be weighing up the odds of a further US$400 million make-whole payment. A 30-day notice given on 20 February, 2013 implies a redemption date of 22 March, 2013, a week after the deadline for special redemption. Missed it by that much.
The case is Chesapeake Energy Corp v. Bank of New York Mellon Trust Co, 2nd U.S. Circuit Court of Appeals, No. 13-1893.
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