Credit Markets Treat BP As If It Were Below Investment Grade

10th Jun 2010 19:05

By Katy Burne Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Credit markets are treating BP Plc (BP, BP.LN) as if it held a near-junk-bond rating, a measure of investors' anxiety over undefined but potentially huge liabilities the AA2-rated company faces for the six-week-old Gulf of Mexico oil spill. At 11:40 a.m. EDT, the cost of insuring BP via instruments known as credit default swaps was quoted at 477.5 basis points, according to CMA Datavision. That is down from 501.3 basis points at 8:25 a.m. EDT and from 557 basis points at 4:18 a.m. EDT. When a highly rated investment-grade company such as BP (AA2, Moody's Investors Service; AA-, Standard & Poor's) starts trading with 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. Spreads on other oil companies related to the spill also rose earlier Thursday, but like BP began to reclaim some ground. At 9:46 a.m., the premium for CDS on Anadarko Petroleum Corp. (APC), which was trading upfront, was quoted at 8%, but by 12:29 p.m. EDT had improved to 7.2%; that on TransOcean Ltd. (RIG) went from 7% to 6.1%. The cost to insure Halliburton (HAL) fell to 165 basis points from 172.7 basis points. The phenomenon of trading upfront is rare for an investment-grade company and means that parties selling default insurance want extra payments at the outset of a contract for providing coverage. Despite the decline in CDS on BP over the course of Thursday morning, the company is viewed as having significant short-term risk. Default insurance on the company is now more expensive over one year than over five years, whereas as recently as Tuesday the CDS curve on the company was upward sloping. Spreads on BP's bonds have been improving in secondary trading in line with its CDS falling. The company's 5.25% bonds due 2013 were 67 basis points tighter on the day around midday, but still yielding close to 7%. That was above the 6.738% yield on Ford Motor Co.'s (F) 7.000% issue due 2013, which Moody's rates Ba3--10 notches lower and well into junk territory. BP said in a statement that it was not aware of any reason that would justify gyrations in its share price, which opened 11% down in London Thursday morning on top of a 16% drop in its U.S. listed shares on Wednesday. As of 1 p.m. EDT its shares were trading in New York at $31.95, up $2.77. There is speculation that the company is a takeover target and Standard & Poor's equity research Thursday morning 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; [email protected] (END) Dow Jones Newswires June 10, 2010 14:05 ET (18:05 GMT)