Dan Loeb

There is now some clarity on activist investor Daniel Loeb’s big investment in Chesapeake Energy Corporation (NYSE:CHK) reported by us here. In fact, the energy company became his fourth largest, and newest holding in June. However, the nature of the investment was not known, and given his activist leanings, and Chesapeake’s governance problems, it was fair to assume it was a long equity position.

However, those speculations have been laid to rest by Katya Wachtel in her Reuters blog.

It turns out Dan Loeb has been buying up Chesapeake’s bonds, and not equity. She also speculates that this time around he may be letting Carl Icahn and others do the cage-rattling at Chesapeake Energy Corporation (NYSE:CHK).

The investment rationale here has many people puzzled. Why would Loeb find bonds more attractive compared to Chesapeake’s equity, which has fallen by over a quarter this year? Sources hint that it is indeed a bond position, and it is a bullish one. No details are known about the specific bonds which Loeb has bought. It is not even known whether he has hedged his position.

Compared to Chesapeake’s equity, its bonds have had a smoother ride on the markets – after the scandals broke, they fell from a high of 104 cents to a low of 90 cents on the dollar, but have since recovered to around 97 cents. It could be that recent changes in the company’s board and governance practices may have placed a floor under the value of the bonds, rendering them a safer buy than previously. However, any investor in the bonds would have surely known of the severe cash flow problems faced by the company that have led it to embark on a program of asset sales.

While more details on this may emerge in the future, suffice it to say that with Loeb’s track record, there would be justification enough. Third Point, his fund, has logged returns of 17 percent, on an annualized basis, since its inception in 1996.