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UPDATE: Credit Markets Treat BP As If It Were Rated Junk

758 words10 June 201017:13Dow Jones Business NewsDJONEnglish(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 thejunk level, a measure of investors' anxiety over undefined but potentially huge liabilities that the AA2-ratedcompany 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, whichMoody's rates Ba3--10 notches below BP and well into junk territory. The BP bonds later climbed to 95.5 cents onthe dollar to yield 6.753%.

Meanwhile, the cost of insuring against BP's defaulting on its debts rocketed early Thursday before falling backlater in the day. At one point, insurance in the form of credit default swaps cost $557,000 a year to cover $10million in debt for five years. That was up from $368,000 late Wednesday. The cost drifted down to $477,500Thursday afternoon.

Despite the decline in CDS later Thursday, investors believe BP has significant short-term risk. Default insuranceon the company is now more expensive over one year than over five years, an unusual phenomenon that is "aclassic 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 towithstand even this blow," said Thaddeus Strobach, credit strategist at Royal Bank of Scotland. "But we are nowmoving from a fundamental, financial calculation to an amorphous and emotional realm of the political and thepunitive, 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 toStandard & Poor's Market Derived Rating.

Credit insurance on other oil companies related to the spill also rose Thursday. CDS on Anadarko PetroleumCorp. (APC) was available only if investors were willing to pay 7.2% of the amount insured as an upfront premiumplus $500,000 per year, though that was down from 8% upfront earlier in the day. Insurance on rig operatorTransOcean 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.

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On April 22, the day that the Deepwater Horizondrilling rig sank in the Gulf of Mexico and started the worst oilspill in U.S. history, CDS for BP, Anadarko and TransOcean required no upfront payments. The cost to insure BPdebt was $43,200 a year on $10 million of debt; $67,700 for that amount of TransOcean debt and $76,400 forAndarko'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 ofits 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 cutits 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 tospeculation about whether it had hired legal counsel to explore the possibility of seeking bankruptcy court help tolimit 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, aswell 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 ]

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