Markets give BP 39% odds of going under

Credit investors are pricing in a 39 percent chance BP Plc will default within five years as it tangles with the Obama administration over cleanup costs and claims for the biggest oil spill in U.S. history.  The Credit Default Swap Spread have broken way wide, via Bloomberg:
The default risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision. BP swaps climbed as much as 124.5 basis points to a record 630.6. BP debt due next year traded today at distressed levels, with investors demanding as much as 1,251 basis points in yield more than Treasuries.

BP, whose executives met today with President Barack Obama at the White House, has tentatively agreed to place about $20 billion over several years into a fund to pay compensation to residents along the Gulf of Mexico, a person familiar with the talks said. The company, which had $27.7 billion in cash flow from operations in 2009, was cut six levels to BBB -- two levels from junk -- from AA by Fitch Ratings because of mounting costs from the underwater well that’s spewed crude for eight weeks.

BP’s $750 million of 1.55 percent notes due in 2011 rose 0.25 cent to 92.5 cents on the dollar as of 12:26 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, after earlier trading as low as 88 cents before news of the escrow fund. The bonds traded the most ever yesterday, according to data compiled by Bloomberg.

The securities, which rose as high as 101.2 cents in February, pay a spread of 887 basis points. Bonds that trade with relative yields of more than 1,000 basis points, or 10 percentage points, are considered distressed. Credit-default swaps on BP debt were up 110 basis points, paring the earlier rise.

BP’s shorter-term borrowing costs are rising in a signal lenders are increasingly concerned they may face losses. BP notes due in 2011 yield 208 basis points more than the company’s 4.75 percent bonds due in 2019, Trace data show. The shorter- maturity debt yielded 326 basis points less as of April 29.

BP had $6.84 billion in cash and near-cash as of the end of the first quarter, according to a regulatory filing. It has spent $1.6 billion to stop the leak, clean it up and compensate local businesses and residents, according to figures posted on the company’s website. Liabilities may reach $37 billion, Credit Suisse Group AG estimated in a June 2 report.

Interest rates on some floating-rate municipal bonds guaranteed by BP have surged to as much as 10 percent on concern the costs of the cleanup and litigation are spiraling higher.

BP bonds have lost 14.6 percent this month, after declining 2.62 percent in May, according to Bank of America Merrill Lynch index data. The overall U.S. energy company index has fallen 1.3 percent in June.

The fall in BP’s bond prices has to be seen in the “context of the asset values and the earnings capability of this company,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. “When you’re talking about a company that can earn $20 billion in 2011, before its dividend, that’s significant flexibility.”


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