2nd UPDATE: Liability And Settlement Whipsaw BP's Debt Swaps

16th Jun 2010 18:20

(Updates CDS level, adds bondholder quote.) By Katy Burne and Anusha Shrivastava Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The cost of protecting BP PLC's (BP, BP.LN) debt soared to its highest level ever Wednesday before falling again on news of a deal with the U.S. government over the company's liability for the oil spill in the Gulf of Mexico. BP's five-year credit default swaps, or CDS, jumped as much 26% Wednesday, to 625 basis points from 495 basis points Tuesday, according to data provider Markit. This means investors would have had to pay $625,000 annually to protect $10 million of the company's debt for five years, compared with $495,000 on Tuesday and $424,000 on Monday. That cost came down to $550,000 a year on reports that BP had agreed to set aside $20 billion to cover cleanup costs and claims from the fishing and tourism industries along the Gulf coast. The settlement was at the high end of expectations, but traders and investors said having a firm number was better than nothing. Some bondholders were wondering whether BP would be see its credit rating fall further if its liability was unlimited. Fitch Ratings slashed BP's rating by six notches to near junk level on Tuesday, citing the potential upfront costs from the spill. "This is a gut reaction to the situation the company is in," said Scott MacDonald, director of research at Aladdin Capital Holdings in Stamford, Conn. "It will be held responsible for the cleanup costs and it got whacked in terms of its ratings." On Wednesday, Fitch said BP was unlikely to have to sell assets to pay the costs of its oil spill in the Gulf of Mexico and the company would probably not be broken up as a consequence of the environmental disaster. "We expect BP to make it through the challenge of this," without being broken up, said Richard Hunter, Fitch's head of Europe, Middle East, Africa and Asia Pacific corporate finance. Fitch estimated BP's liability for containment, cleanup and compensation resulting from the oil spill was around $6 billion, said Jeffrey Woodruff, senior director in Fitch's Europe, Middle East and Africa Energy team. Civil penalties for the spill could be between $2 billion and $8 billion, he said. BP could fund these costs from its balance sheet without needing to sell assets, he said. Others concurred with that assessment. "We expect a compromise will be reached...that will formalize BP's pledge to pay all legitimate claims without losing all financial control, and without forcing BP into court for protection," Phil Adams, senior investment grade analyst at Gimme Credit, an independent credit research firm, wrote in a note. The CDS of other oil companies tied to the spill were also quoted at higher levels. Anadarko Petroleum Corp.'s (APC) CDS were at 706 basis points, 20 basis points wider than Tuesday's close; TransOcean Ltd.'s (RIG) CDS were 30 basis points wider at 649. Bond yields are higher across the board for BP and Anadarko on Wednesday as traders sell off the troubled oil companies. One BP bond maturing in November 2013 is the most actively traded in the markets Tuesday. The price for that bond has fallen 2 1/4 to 88 3/4 for a 9.196% yield, according to MarketAxess. "The BP thing became too volatile. We had to limit our risk and it became too political," said Patrick Sporl, senior portfolio manager at American Beacon Advisors, who sold BP bonds last week after holding them for nearly a year. "Since we're high-quality, low-volatility managers, it's hard to justify owning that [company] now." The yield on Anadarko's most actively traded bond, which matures in May 2011, is slightly higher so far. TransOcean bonds are trading at light volume, with yields on longer-term notes all edging slightly higher. -By Katy Burne and Anusha Shrivastava, Dow Jones Newswires; 212-416-3084; [email protected] (James Herron in London and Christopher Dieterich in New York also contributed to this report.) (END) Dow Jones Newswires June 16, 2010 13:20 ET (17:20 GMT)