UPDATE: Credit Markets Treat BP As If It Were Rated Junk 758 words 10 June 2010 17:13 Dow Jones Business

News DJON English (c) 2010 Dow Jones & Company, Inc. (Updates with analyst comments and context.)

By Katy Burne Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Credit markets were treating BP Plc (BP, BP.LN) as if it held a bond rating near the junk level, a measure of investors' anxiety over undefined but potentially huge liabilities that the AA2-rated company faces for the six-week-old Gulf of Mexico oil spill. At one point Thursday, the company's 5.25% bonds due 2013 traded for 93 cents on the dollar, yielding 7.627%, according to MarketAxess. That topped the 6.738% yield on Ford Motor Co.'s (F) 7.000% issue due 2013, which Moody's rates Ba3--10 notches below BP and well into junk territory. The BP bonds later climbed to 95.5 cents on the dollar to yield 6.753%. Meanwhile, the cost of insuring against BP's defaulting on its debts rocketed early Thursday before falling back later in the day. At one point, insurance in the form of credit default swaps cost $557,000 a year to cover $10 million in debt for five years. That was up from $368,000 late Wednesday. The cost drifted down to $477,500 Thursday afternoon. Despite the decline in CDS later Thursday, investors believe BP has significant short-term risk. Default insurance on the company is now more expensive over one year than over five years, an unusual phenomenon that is "a classic sign of credit distress," said Gavan Nolan, a credit analyst at data provider Markit in London. "BP generates a great deal of cash flow from very solid assets and we believe it has the financial wherewithal to withstand even this blow," said Thaddeus Strobach, credit strategist at Royal Bank of Scotland. "But we are now moving from a fundamental, financial calculation to an amorphous and emotional realm of the political and the punitive, so it's extremely difficult to quantify the ultimate costs to BP." When a highly rated investment-grade company such as BP (AA2, Moody's Investors Service; AA-, Standard & Poor's) starts trading with a spread of 500 basis points in the CDS market, it signals that it is being viewed as equivalent to a junk-rated credit, even though the company is rated one notch below U.S. government debt. By one measure, BP's credit-default swaps are trading at levels equivalent to BB-rated companies, according to Standard & Poor's Market Derived Rating. Credit insurance on other oil companies related to the spill also rose Thursday. CDS on Anadarko Petroleum Corp. (APC) was available only if investors were willing to pay 7.2% of the amount insured as an upfront premium plus $500,000 per year, though that was down from 8% upfront earlier in the day. Insurance on rig operator TransOcean Ltd. (RIG) also required an upfront payment of 6.1% of the amount insured. The phenomenon of "trading upfront," or requiring prepayment of fees, is rare for an investment-grade company. Page 1 of 2 2014 Factiva, Inc. All rights reserved.

On April 22, the day that the Deepwater Horizon drilling rig sank in the Gulf of Mexico and started the worst oil spill in U.S. history, CDS for BP, Anadarko and TransOcean required no upfront payments. The cost to insure BP debt was $43,200 a year on $10 million of debt; $67,700 for that amount of TransOcean debt and $76,400 for Andarko's bonds, according to CMA Datavision. BP said in a statement that it was not aware of any reason that would justify gyrations in investors' perceptions of its value. BP American depositary shares fell 16% on Wednesday to a 14-year low, but climbed more than 10% on Thursday. There is speculation that the company is a takeover target and Standard & Poor's equity research Thursday cut its recommendation on BP to hold from buy. Market participants were attributing the sharp decline in the oil giant's shares and the spike in its CDS to speculation about whether it had hired legal counsel to explore the possibility of seeking bankruptcy court help to limit its liability in the spill. BP has repeatedly said that its capital position is strong enough to withstand the spill in the Gulf of Mexico, as well as claims and lawsuits. The Obama administration is pushing the company to suspend its dividend. -By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com (Chris Dieterich also contributed to this article.) [ 06-10-10 1713ET ] Document DJON000020100610e66a0007w Search Summary Text Date Source Author Company Subject Industry Region Language "deepwater horizon" 20100610 to 20100610 Major News and Business Publications: U.S. All Authors All Companies All Subjects All Industries All Regions English

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