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Chesapeake credit downgraded, company boosts loan

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May 15, 2012 05:54 PM EST | AP

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NEW YORK — Standard & Poor's lowered Chesapeake Energy's credit rating Tuesday, questioning how quickly the company could remedy its financial woes.

Chesapeake shares dropped more than 6 percent to the lowest level since March 2009.

The credit ratings agency believes that Chesapeake will struggle to generate enough cash to pay off its debts as natural gas prices plunge. Standard & Poor's also noted that the "mounting turmoil" from CEO Aubrey McClendon's personal financial dealings could make it tougher for the company to raise money in the future.

Chesapeake said Tuesday that it boosted the size of an unsecured term loan from Goldman Sachs Bank USA and affiliates of Jefferies Group Inc. from $3 billion to $4 billion.

Chesapeake said the $3.8 billion in net proceeds from the loan will be used to repay debt under a revolving credit facility, and for general business purposes. The company said it was increasing the loan because of strong investor demand.

S&P pushed Chesapeake further into junk investment territory by dropping its rating a notch to "BB-," saying the company "faces major ongoing uncertainties to adverse business, financial and economic conditions."

Chesapeake, like other petroleum companies, saw revenues sink this year as natural gas prices tumbled to a 10-year low. It's working to produce more profitable crude oil and liquid hydrocarbons, but the shift is costly and risky for a company with high debt.

Meanwhile, published reports have revealed a number of corporate governance issues surrounding McClendon. The CEO ran his own hedge fund that placed bets on the price of oil and natural gas _commodities that his company produced. McClendon also took out a personal loan from a company that was planning to buy Chesapeake assets.

Chesapeake, based in Oklahoma City, has since stripped McClendon of his board chairmanship, and some analysts and investors are calling for him to be removed as CEO as well. Investigators from the Internal Revenue Service and the Securities and Exchange Commission are reviewing the company's operations.

Argus Research analyst Phil Weiss has advised investors to sell Chesapeake shares. "We think that investors are likely to keep the company in the penalty box without a real change in its financial practices," Weiss said in a separate note. "Such change needs to start at the top."

Shares of Chesapeake Energy Corp. dropped 87 cents, or 5.6 percent, to close at $14.65.