Natural gas producer Chesapeake Energy Corp.'s (NYSE: CHK) $1.5 billion leveraged loan has hit stratospheric price heights in the secondary market normally reserved for high-yield bonds, boosted by a combination of stiff investor protections and rebounding commodity prices.

When the company tapped the loan market this summer, investors were lured by an atypical feature preventing the debt from being called for two years, and then paying big premiums if the debt was repaid. Ongoing recovery from historic energy price lows also stoked investor demand for Chesapeake's loans in the secondary market, investors said.

Chesapeake's leveraged loan made an immediate splash in the loan space. Upon freeing to trade in August, within a few days the term loan spiked 2 full points past its par issue price. Over the past two months, the loan has steadily advanced to a bid of 106.5 on Oct. 19 in the secondary market, alone among liquid trading loans at these lofty levels.

"The loan is non-callable for two years, which is really rare in loan-land," said Lauren Basmadjian, portfolio manager at Octagon Credit Investors. "It became sort of a hybrid as typical term loan and typical high-yield lender demand morphed into one: a loan with a very high coupon and some real call protection, but not as much as it would have had to give if it was purely a high-yield bond."

The primary reason for the ceiling on leveraged loan prices is their susceptibility to being called once the price climbs above par. As a small bit of protection, many loans come with a feature where the issuer promises to pay a premium--usually 101--if they call a loan during a specified amount of time, usually six months to a year after the deal inks.

In Chesapeake's case, its unique two-year non-call protection is in particular demand now, when a vast number of performing loans are being repriced to cut spreads and make other borrower-friendly adjustments. The Chesapeake loan also pays a relatively large premium if it does get called after the two years: at 104.25 in year three, and 102.125 in year four before moving to par.

Most loans being repriced now have run through their call protection. But the market is so strong that some issuers, including member-owned healthcare company Vizient, paid lenders a premium of 101 in order to reprice before that protection ran off.

With demand so robust for floating-rate assets, with the Federal Reserve on course to soon raise interest rates, loans including Vizient's have performed well even after being repriced. Vizient's secondary loan price was unmoved after the spread was cut to 400 basis point (bp) over Libor with a 1% floor from the old pricing of 525 bp over Libor with a 1% floor.

"It's hard to fight back on repricings when repriced loans immediately trade above par," said another loan investor.

Commodity Rebound

Seeing an open window in the loan market during the summer, Chesapeake opted to mint the debt as a term loan. Chesapeake was a known name in the loan space because it had a $2 billion term loan until the spring of 2014, when the company opted to pay down the term loan with proceeds from the issuance of $3 billion of senior notes that included a $1.5 billion floating-rate senior note due 2019 and $1.5 billion senior note due 2022.

Demand for Chesapeake's five-year loan in August enabled arrangers, led by Goldman Sachs, Citigroup and MUFG, to hike the size to $1.5 billion from $1 billion. Proceeds were used mainly to finance a tender offer for the company's unsecured notes.

Pricing on the loan of 750 bp over Libor with a 1% floor was far higher than average for a first-lien term loan this summer and fall, and more akin to second-lien term loans or high-yield bond spreads. There was little other issuance in the tumultuous energy segment at the time.

The Chesapeake loan kept sprinting higher in the secondary market on the wings of rallying energy prices, on top of the banks' moves to quell fears that the loan would be called away from investors and to offer a spread seen as generous.

The average secondary bid in the oil and gas loan sector rose past 90 in October, and was at 91 on October 19, compared with 87.78 on August 16, when the loan priced, and a recent low of 75.24 on January 25.

Natural gas prices have climbed 21% since mid-August, and settled at $3.17 per million British thermal units on the New York Mercantile Exchange, due to record temperatures that boosted air conditioning usage. Oil prices have also risen. The world benchmark Brent crude settled at $52.67 per barrel (bbl) and US benchmark WTI settled at $51.60/bbl on Oct. 19 after OPEC surprised markets in September by its decision to cut production to stem the supply glut that has depressed crude prices.