4th UPDATE: Liability And Settlement Whipsaw BP's Debt Swaps

16th Jun 2010 22:57

(Adds CDS level, BP quote and CDS volume in the third, fourth, eighth, 13th to 15th and 19th paragraphs.) 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 as 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 $545,000 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. As of June 11, some 354 CDS contracts on BP debt were traded; they were worth a net notional $392 million, or a gross notional $1.99 billion, according to the Depository Trust & Clearing Corp. Traders and investors said having a firm number was better than no estimate of how much BP might have to pay. Some bondholders were wondering whether BP would see its credit rating fall further if its liability were 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 LLC 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 probably wouldn't 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. BP Chief Financial Officer Byron Grote said during a conference call that the runup in credit-default-swap spreads had "created some uncertainty" among bondholders about the nature and extent of BP's liabilities for the spill. "Hopefully this will create a calming effect in those quarters," Grote said. Fitch estimated that 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 13 basis points wider at 632. Bond yields were also particularly volatile Wednesday. The yield on BP's most-traded issue, a five-year note due in 2013, fell to 7.771% at the end of the day from 8.353% on Tuesday, according to data provider MarketAxess. Before news of the dividend and cleanup fund, the yield on that bond had leapt as high as 9.865%. Bond yields move inversely to their price. That kind of movement has taken its toll on BP bondholders, including Patrick Sporl, senior portfolio manager at American Beacon Advisors, who sold BP bonds last week after holding them for nearly a year. "The BP thing became too volatile. We had to limit our risk and it became too political," Sporl said. "Since we're high-quality, low-volatility managers, it's hard to justify owning that [company] now." Bill Gross, co-investment chief for Pacific Investment Management Co., said Wednesday that the huge bond-fund firm holds "very small amounts" of BP debt but has recently begun buying one-year bonds issued by the oil company. Gross, interviewed on CNBC, pointed out that BP's five-year bonds yield 6% to 7% while its 12-month paper has a yield of 10% to 11%. "At this point, if you can get 10% for one-year paper on BP, we think it's closer to double-A than triple-C" in terms of debt quality, the Pimco executive said. "That's a significant value and we've started to buy some." The yield on Anadarko's most actively traded bond, which matures in May 2011, rose to more than 11% on Wednesday before settling back to close at 8.577%; it was 8.141% on Tuesday. Transocean's most-active issue, due March 2013, closed to yield 7.937%, compared with 8.253% on Tuesday. -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 article.) (END) Dow Jones Newswires June 16, 2010 17:57 ET (21:57 GMT)