Daniel Loeb goes long Chesapeake bonds; leaves activism to others

July 25, 2012

Daniel Loeb, who runs $8.7 billion at his hedge fund Third Point, has been an opportunistic buyer in the bonds of Chesapeake Energy, the embattled natural gas producer, according to sources familiar with the matter.

But Loeb, known to rattle the cages of companies for years (see: war with Yahoo), isn’t piggybacking on Carl Icahn’s or O. Mason Hawkins’s activist role in Chesapeake, demanding changes in management or the overhaul of its business practices.  Indeed, all the elements are there for a veteran agitator like Loeb, as Chesapeake has been embroiled in scandal over a controversial investment program involving CEO Aubrey McClendon.

But the New York-based hedge fund manager, who told his investors in June that Chesapeake is now his fund’s fourth largest position, could simply be making a straight investment play and leaving the rest to Icahn and Hawkins. Imagine that?

“If you are investing in Chesapeake right now, you are investing because you think the assets are worth more than the market value of the outstanding debt and equity of the company,” said Dan Fuss, vice chairman and portfolio manager at Loomis Sayles, which holds $172 billion in assets under management.

“These are now asset plays, not a quarter-by-quarter earnings play.”

Like Loeb, Fuss likes Chesapeake bonds better than the stock.

For their part, Chesapeake’s shares have sunk more than 25 percent this year, though after it hit rock-bottom in May the stock has climbed in value and is hovering around $17.

The revelation that Loeb is wagering on Chesapeake left some wondering what his thesis on the company may be,  since his recent investor note didn’t say whether Third Point had bought bonds or shares in Chesapeake, or whether the position was bullish or bearish. But three people familiar with Loeb’s strategy said the  manager has been more focused on Chesapeake’s debt rather than its beaten down stock. One of those sources said Loeb is  more bullish on the bonds than bearish, but stopped short of revealing the dollar value of the fund’s exposure.

Sources did not know or reveal which series of Chesapeake bonds Third Point has scooped up, or if Loeb is hedging the bet with credit default swaps. Loeb did not return a request for comment.

Some of Chesapeake’s most widely-traded bonds dropped to near or below 90 cents on the dollar after McClendon’s controversial business dealings were disclosed in April. The bonds have recovered some of those losses since then, and are trading around 97 cents on the dollar. Some had been trading at 104 cents or higher before the Reuters report.

David Epstein, a managing director at broker-dealer CRT Capital, told us that changes in Chesapeake governance and its board mean “the prospect of extreme downside scenarios from a fundamental perspective may have been removed, which is good from the perspective of the bonds.”

That said, McClendon’s role at the company remains a point of controversy. And the company is beset by financing and debt issues.

“There are still significant challenges, like completing asset sales in a timely fashion,” said Biju Perincheril, an analyst at Jefferies that follows the energy company. But Perincheril also said that “stricter financial discipline will help turn the company around.”

On Tuesday, Loeb hosted a webcast with his Third Point investors to discuss the performance of his funds, the largest of which is up about 3.9 percent for the year. Since the fund launched in 1996, Loeb has achieved annualized returns of about 17 percent. And with a track record like that, it’s difficult to ignore when Loeb makes a big bet, as he’s doing now on Chesapeake.

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