BP Bonds Rally On Dividend Cut And Creation Of Cleanup Fund

16th Jun 2010 22:09

By Chris Dieterich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC (BP, BP.LN) bonds rallied Wednesday after the company agreed to cut its dividend and put $20 billion into an independently administered fund to help pay for claims as a result of the Gulf oil disaster. The yield on BP's most-traded issue, a five-year note due in 2013, fell to 7.771% Wednesday 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. BP debt was also helped when Bill Gross, co-investment chief for Pacific Investment Management Co., said 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 currently 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 cost of protecting BP's debt also improved late Wednesday, after having soared to its highest level ever earlier in the day. 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 after the company announced the fund and its dividend cut. -Christopher Dieterich, Dow Jones Newswires; 212-416-2611; [email protected] (Katy Burne also contributed to this report.) (END) Dow Jones Newswires June 16, 2010 17:09 ET (21:09 GMT)