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BP debt to be rated as junk? Bond and derivatives market say yes.
Some interesting tidbits coming from the credit markets about BP longterm debt prospects. As reported by Bloomberg, across-the-board downgrades of BP debt are almost imminent.
BP’s $3 billion of 5.25 percent notes due in 2013 fell as low as a record 89.94 cents yesterday, pushing the yield to 7.57 percentage points more than Treasuries. The spread compares with an average of 7.26 percentage points for junk bonds, Bank of America Merrill Lynch indexes show. The cost to protect $10 million of BP debt for a year with credit-default swaps almost doubled to $512,000, according to CMA DataVision. It was $29,000 on April 30.
My personal belief is that the market is pricing in the risk of cash reserve depletion due to the run up in costs of GoM spill service. Credit Suisse had this to say regarding BP debt:
Debt investors are losing confidence in London-based BP as the company fails to contain the oil leak in the Gulf of Mexico. BP said June 7 it has spent $1.25 billion so far, or about $27 million a day, related to the accident. Credit Suisse Group AG estimated the total cost may reach $37 billion.
Here is the ballance sheet [end of 2009] summarization of BPs assets and liabilities:
The alarming metric here is the rate of cash holding deterioration; which now runs at a whooping 15% of total cash and cash equivalent holdings as of end of 2009.
And let us not forget that little has been achieved so far regarding the problem. Even if BPs estimates as to how much oil is now being recovered with their latest effort are true [I personally doubt any and all "official" figures]; there still exist the question of whether or not there is another, far bigger and more damaging leak located 5-6 miles from the acknowledged one.
Matt Simmons, one of the most regarded experts in the oil industry, says that yes; there is a much bigger, and more damaging leak:
This means that if/when BP acknowledges the existence of this leak the costs to service the damage will not only exceed cash and cash equivalent holdings, but will require of BP to either resort to liquidation of some of its assets or to sell new debt [which will solely serve the purpose of financing the services required to dent the impact of the leak] in the open market.
That debt will surely be priced as junk since the current debt ratings are nowhere near as representative of the gravity of the situation as are the price movements in the derivatives and bond market.
Credit-default swaps on BP implied a Ba2 rating for the company as of June 8, nine steps lower than its actual Aa2 grade at Moody’s Investors Service, based on data from the ratings firm’s capital markets research group. The implied rating was as high as A3 on May 28, the data show. Junk bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.
As mentioned above; both derivatives and the bond market price BP debt as junk. Yields and spread signal that another wave of downgrades is but a certainty.
These are the movements in BP CDS spread as of 8:30 am GMT:
Spread has widened to 538.23 bps for 5 year debt, or 152.31 basis points from yesterdays close which is an increase of 39.47%
We will monitor the situation closely all through the day. Market expects downgrades before weekend and those could happen today. If anything new emerges relevant to this situation during the day, you will be fully updated in the comments section.
OT: Worthy of a read is the article Tyler posted yesterday and in which he discusses potential counterparty risk regarding the OTC derivatives which reside on BPs balance sheet.
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I finally understand what is being said about a "second leak" far away from what is shown on TV.
This video is almost 2 weeks old.
What is the current status of thinking regarding this?
Simmons has given at least 3 major interviews... and right now his phone is off the hook.The experts at theoildrum.com have pretty much debunked both Simmons and the "nuke" option (go there and use the search, baby):
Simmons Cliff Notes.
(1) Simmons' speculation begins with (a) he thinks gusher the world is watching 24/7 is "too small" to produce such massive plumes and (b) he thinks the PSI he sees there is not enough to bring down an oil rig the size of aircraft carrier and (c) he thinks casing is fucked in multiple places = multiple leaks (d) he does not believe the relief wells will work.
(2) Simmon's is not saying this or that... he is floating radical ideas that might actually explain what is going on. And his main business is investment and wind power.
(3) The US does not possess a nuke designed go boom in hole > 5,000 feet under water due to pressure conditions, etc. Though the US could custom build such a device... it would be a 6-12 month mini-Manhattan Project, baby. The idea is to melt all the rock and seal the oil field. Seems like lots of room for error here.
When the President of the United States is the person inciting the lynching...there is a VERY big problem indeed.
BP will end up in bankruptcy for two reasons. First, any purchasers will want the assets free and clear, leaving the environmental liabilities with the bankruptcy estate. Second, once the federal prosecutors get assigned to a media frenzy case like this, there's no holding them back. It's a foregone conclusion that BP will get the Arthur Andersen treatment, if only so the government can say that it did something.
Bullshit, its never going bankrupt.
I am up 9.6% from yesterday, I know its not over but it was a good time to buy a first tranche.
Just thinking of BK and BP's assets. The primary assets they are counting is the reserves. Right now they are drilling on leases if I'm not mistaken. Leases that could be jerked away which means they no longer would count the proven oil or the reserves as assets to be used to pay off debt.
US Oil companies would love to have BP's assets and sink the company with the liabilities. Congress is corrupt beyond redemption. Hell the whole govt is. We just got done unleashing the Black plague of finance on the world. I see no reason why one couldn't connect these seemly disparate fragments to push BP into a BK.
Ben will print some money up to slip the pension funds for the UK.The rest of the shareholders will be punked which is how it should be.
Yeah I would love to be long a stock with all the huge massive liabilities it faces rising by 120,000 BBls a day. Go take it for a spin when it goes up if you can time it, but this should be good for another 50% down at the minimum. It will take years to assess the full liabilities. Going by fines is a joke. This company screwed up and it's not something that can be hidden in computers . It's all over the place and one of the most visually disgusting things I've seen. It's like looking at a big shit on your TV all day. What great imagery to have next to a corporate name.
It's killed and will be killing people and killing industries.
Yeah, it's a Perfect time to "back the truck up" , to quote a million messages on the Yahoo message boards about pets.com back in 2000. They at least had a sock pet.
BP is the biggest corporation in the United Kingdom. BP's dividend is 12% of all dividends paid in the UK. It's not going bankrupt.
These days, I would never say never . But assuming they are Great Britian's new AIG now, the company is crippled for as long as I will be alive. The profits they make will all go towards paying for this mess. After all they may be the biggest company in the UK, but after you pour all those liabilities arising from the spill on it's balance sheet the valuation of the company will never be established in a manner that is satisfactory to the market. AIG was once worth close to 200 Billion and is now down to 5-6 Billion which most believe is total BS, which should suggest there is there is more than one way to go bankrupt.
Great Britain is just about out of any money to prop it up and who knows how much damage the spill will do to 5 states and the individuals that live there, possibly more. Just Florida's tourism alone would take 5 BPs to match the revenues brought in each year that will now go elsewhere.They have 6 Billion in cash and they actually have to operate and drill to get oil out of the ground to put it on the market to bring in more cash. Just their petty cash expenditures so far have been 1.27 Billion or more. Despite the company's sheer size , my bet is that a significant amount of it's monetary and human assets are being thrown at this problem, because really, the last thing they can afford , with companies that can easily bulk up to that size, is to be seen to foreign hosts as a threat to their country and it's future.
When a company is a proven threat to the host countries that give it leases on oil reserves, those leases can be taken away . I would say right now that BP is doing as much dollar damage , overt and hidden, as a smaller country could do that we are at war with. Consider the ramifications of that and then ask yourself if those oil reserves on leases are enough to hold up to that especially when other countries, with far less to work with has to decide if they will work with a company that puts safety with profits or ignores safety completely and egregiously for quicker profits. They don't have the assets we have to respond and its very questionable whether we have those assets at all. Timmy may have given them all to the banks by now.
If BP finds it difficult for various reasons to pay a dividend, then why would anyone invest in a company like that these days. Fannie Mae was a widow and ophan's stock and no it didn't go bankrupt, not in the tradtional sense, but it's also not worth anything to all the pension funds and individuals who held that stock for the dividends. BP may be good for a trade to the upside, if you are fast and lucky enough, but the least resistance for it now is down.
People are still in small picture mode. When a larger picture arises where a company can become so big it can threaten a country, then it has created a problem for itself that 100s of billions of dollars won't solve.
I think you are using the word tranche wrong; unless you bough a CDO/CLO/CDO[2] compromising solely of various BP bonds and loans [which you couldn't since the debt rating is universal to a single name].
I think what you mean to say is "block" ...
Im not trying to be smart or anything but some people might get confused.
And yes; its not going BK, probably being taken over.
This is very ugly! Nice job
Don't you just love it how it's ok for the Company to spin, but it's not ok for the market to over react.
They should try telling the truth instead of spinning.
And if they just don't know they should say so.
How much does it cost to clean the Gulf of Mexico. What a question!
The end all , start all is derivatives. They get paid 1st, and quicker than any other party.
Thats why the whole AIG -goldman - Paulson string was so easy to get paid in full. Immediately thanks to timmy G.
Matt Simmons is now on the other side of the trade so I no longer believe a word he says.