UPDATE:Anadarko Debt-Insurance Cost Rises On Downgrade,BP Fight

21st Jun 2010 18:37

(Updates CDS figures, adds comment from analyst who says Anadarko is positioning itself for a fight over liability.) By Katy Burne Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The cost of protecting Anadarko Petroleum Corp. (APC) debt from nonpayment rose Monday after the company accused BP PLC (BP, BP.LN), its partner in the leaking Gulf of Mexico oil well, of "gross negligence" and saw its long-term debt rating from Moody's Investors Service cut to junk. Protection in the form of credit default swaps rose to 4.25 points upfront from 3 points Friday, meaning someone buying insurance on $10 million of Anadarko debt for five years would have to pay $425,000 upfront on top of annual payments of $500,000. The upfront payment Monday was $125,000 more than it was on Friday. Traders typically start asking for payment upfront instead of at intervals when the coverage is in effect if the cost of coverage exceeds 5% of the amount insured. The move to upfront payments is a sign they believe there is a high risk of a quick default. The equivalent annual price for $10 million of Anadarko protection without an upfront payment--what is known as the "running price"--is $610,000, according to Markit data. Moody's downgraded Anadarko on Friday to Ba1 from Baa3, citing its nonoperating stake in the well and therefore its share in the escalating cleanup costs and potential fines. Anadarko hit back that it was "too early" for ratings action. Responding to BP Chief Executive Tony Hayward's statement that its partners in the well should bear some of the costs and blame, an Anadarko spokesman said the spill was preventable and BP failed to heed successive safety warnings. "We are currently assessing our contractual remedies," the spokesman said. "We will do what is right and all questions regarding potential liabilities will be answered at the appropriate time. Our statement on Friday clarified our position that, based on the publicly available information, this tragic event was preventable and likely a direct result of pilot error on the part of the operator, BP." The market has linked Anadarko's response to a potential refusal to pay claims. "What they are doing is positioning themselves for an argument into how much liability there is," said Otis Casey, credit analyst at Markit in New York. "The more likely result is that different parties will have different percentages of the costs. Everyone who's not in the spotlight like BP is trying to figure out how much wiggle room they've got." Mitsui & Co. (MITSY, 8031.TO) had a 10% stake in the joint venture behind the Deepwater Horizon drilling rig, which exploded in flames April 20 and sank in mile-deep water two days later; Anadarko had 25%, and BP had 65%. Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said in a note that he estimated Anadarko could afford a spill that cost $30 billion, assuming it were on the hook for 25%. Credit default swaps on BP were quoted Monday morning at 460 basis points, equivalent to $460,000 a year to cover $10 million in debt, with no upfront fees. That was $2,000 a year more than where it was quoted at Friday's close, according to Markit. CDS on Anadarko started trading upfront around June 9, signaling it was viewed as a riskier credit because sellers of protection wanted extra payments at the outset for providing coverage. The cost of protecting the debt of Halliburton Co. (HAL), which was in charge of cementing in the well, was unchanged, and CDS on Transocean Ltd. (RIG, RIGN.EB), which owned the drilling rig, was 3 basis points more expensive. Meanwhile, risk premiums on BP's 5.25% note due 2013, its most actively traded paper, rose 2 basis points to 609 basis points, meaning investors were demanding a return of 6.09 percentage points above the yield of a Treasury bond of comparable maturity to compensate for the added risk of holding BP bonds. Risk premiums on Anadarko's 6.45% bonds due 2036 rose 26 basis points to 371 basis points Monday morning. -By Katy Burne, Dow Jones Newswires; 212-416-3084; [email protected] (END) Dow Jones Newswires June 21, 2010 13:37 ET (17:37 GMT)