BP's Bankruptcy Would Impair 117 (18% Of Total) Collateralized Synthetic Obligations, Lead To Pervasive Losses

Tyler Durden's picture

Even as increasingly desperate falling knife catchers try to convince someone, anyone to buy up some or all of their shares of BP stock, which is certainly on its way to a guaranteed doubling, tripling or more, the real investing community is ever more carefully looking at the worst case, and its implications. Said implications would be vast, and in addition to wiping out billions in capital from BPs direct counterparties which are already limiting their BP exposure, a topic we touched upon briefly previously, would also impair indirect holders of pre-packaged securitized BP exposure. Today Moody's provides an analysis of which CSOs (just like CDOs but packed purely with synthetic products - think Goldman's Abacus) would be impaired should BP go bankrupt. The rating agency does not stop there, and also analyzes what a bankruptcy of BP peers Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International would look like, and who would be wiped out. Below are the results, which upon further analysis will likely indicate total loss potential well beyond BP's total outstanding debt exposure.

As the recent civil case involving Goldman and the Abacus (and soon potentially others) CDO showed, collateralized products have a special place in the heart of the regulators, due to their avalanche quality of blowing up seemingly completely unrelated entities, which share merely the stupidity of having invested in the same entity. BP, as a company with over $20 billion in debt outstanding, has over the years, seen many of its CDS packaged and repackaged in the form of many and increasingly more complex CSOs. Last week's blow out in BP spreads, in which the 1 Year CDS surged beyond 1,000 bps, has got many people concerned: the least of which are counterparties that are on the other side of the short risk trade. Others include investors in just such CSOs, and other companies whose CDS comprises various tranches in these synthetic obligations, as forced liquidations in any given CSO would result in the blow out spreads in even perfectly solvent companies who just have the displeasure of being packaged in one and the same CSO.

Moody's summarizes:

In the event of BP’s restructuring or bankruptcy, CSO transactions
referencing BP or its affected subsidiaries may experience what is
called a “credit event.” If the credit event occurs, the CSO
transactions will have to meet their payment obligations to the
protection buyers, which will result in the loss of subordination to
the rated CSO tranches. In cases where the subordination is no longer
available, CSO investors will incur the loss.

The rater elaborates:

Last week, credit default swap (CDS) spreads on BP plc widened to all-time highs, reflecting the mounting costs of the Gulf of Mexico oil spill and the ensuing rating actions. BP’s credit deterioration is in turn a credit negative for collateralized synthetic obligation (CSO) transactions that reference BP or the companies involved in the Gulf incident.

Rising Costs of the Spill. After almost two months of unsuccessful attempts to stop the worst oil spill in history, BP is potentially facing billions in containment, clean-up, and litigation costs. It is unclear what these expenses will ultimately amount to over the coming years, as the assessment of the damage is just beginning.

BP Downgraded, CDS Spreads Widen. Our recent downgrade and placement on watch for further possible downgrade of BP and its guaranteed subsidiaries reflects intensified risk that the extended oil spill in the Gulf of Mexico will significantly siphon the company’s free cash flows. Spreads on BP’s credit default swaps rose as much as 124.5 basis points (bp) in one day to a record 630.6 bp as of 16 June 2010. BP’s debt maturing next year recently traded at distressed levels, and there is a growing concern among credit investors over a scenario where BP plc might default.

So which CSOs should readers be very concerned if they have these among their holdings? Below is the list:

We reviewed our entire universe of outstanding CSOs and determined that exposure to BP and its rated subsidiaries appears in 117 (excluding CSOs backed by CSOs) transactions, which represents approximately 18% of global Moody’s-rated CSOs. Exposure ranged from 0.26% to 2% of the respective reference portfolios. The transaction with the largest exposure to BP and its subsidiaries is Arosa Funding Limited – Series 2005-5.

Restructuring or Bankruptcy of Other Oil Companies Involved in the Spill Also Affects CSOs. In addition, we assessed Moody’s-rated CSO exposure to the other four companies and their subsidiaries that were involved in the Gulf of Mexico incident, which are Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International. Halliburton appears in 43 CSOs, Anadarko Petroleum appears in 28 CSOs, Transocean Inc. appears in 79 CSOs, and Cameron International appears in 6 CSOs. We recently changed the credit outlooks for Transocean and Anadarko Petroleum, as well as their rated subsidiaries, to negative from stable because of uncertainties related to the companies’ involvement in the Gulf of Mexico incident and potential financial liabilities associated with it. The CSOs referencing one or more of these issuers would face credit event consequences in a scenario where any of them restructures or enters bankruptcy.

The exhibit below lists CSOs (excluding CSOs backed by CSOs) with over 3% exposure to the five companies involved in the Gulf of Mexico incident.


We will collect information on Arosa 2005-5 as well as the top three consolidated CSO, Dundee Series 45, Delaware 2004-34, and Orso Trust 1, as something tells us due to unrelated losses, the securitizations are already largely impaired. Should BP go down it will, on a diluted basis, wipe out many more pro rata billions in value once protection sellers scramble to cover margin and collateral calls. Add the other drilling usual suspects, and the losses could amount well into the hundreds of billions. We hope to have this analysis in advance of a possible BP chapter 11 to hopefully prevent investors from finding out they owe money only after the fact.

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velobabe's picture

what rule number one.

my rule one for max keiser,

is never let them use those stupid still pictures of you again,

M A X, while your audio is playing.

in a trench coat getting out of a taxi.

rule #2, always look your best, consult your handler first,

cause you are

H O T       H O T      H O T      H O T†


Mr Lennon Hendrix's picture


Oh, and here, but you know I know you know, but here.


velobabe's picture

no i didn't know.

actually not up on a lot fight club. except the actors are all hot†

takes me a while, so little helpers like your video's, i enjoy.

definitely my rule is #6.

have the rules printed out and up on my wall.

Implicit simplicit's picture

This might be one of the main forces in the underground radio network when Bama boy pulls the plug.

TheGoodDoctor's picture

Shit dude Alex already is. I have been listening to Alex since I read his analysis of the Patriot Act back in 2001. I had to write a paper on it for a class. I could not believe what was in that bill. Bought every god damned film the guy had out in 2001 immediately. About 8 or 9 at the time. That is when I woke up. His documentaries blew my mind. I realized that I had been lied to my whole life. And at the time I was just going back to college for a second time. Discovering Alex changed my whole perspective on things. Just as Zero Hedge has done the same on investing, the machinations of the markets, economics, politics etc. I am so glad I discovered this site. This site and its authors and members have educated me so much. (Thanks everyone!) :)

Alex has grown by leaps and bounds. Just from what I have gleened from what he says about his IT infrastructure costs (I'm in the biz or was /sarcasm off) it sounds like he has put a lot of money into his transition to the digital media age. I have seen him go from just a couple of web sites to now I think at least a half dozen.

As mentioned above the archives used to be pay ($10 a month), now free. He has podcasts and live streams 24 hours a day on the www.infowars.com site. GCN is really good about offering their radio programs/archives for free too. Archives of all their shows go back many years. The only problem I have is I wish to Christ they would list the guests he has on each day in the archives. That would be so helpful (same with GCN too) 

And then he moved to an extra premium pay site www.prisonplanet.tv (all of www.infowars.com is free and the other sites too) and made all his movies accessible by subscription also many by others and videocasts of his show plus other stuff too. Pretty cheap subscription for a year too I might add. Though, you can see most of his movies on Google or You Tube now for free.

He's done damn near 20 documentaries too. His next one is supposed to be about chemtrails. (Endgame, the Police State series (4 of them), 9/11: The Road To Tyranny, Martial Law, Masters Of Terror and Matrix of Evil are all awesome). He is meticulous about the sourcing of his info too. He also sells t-shirts (some really good ones), videos, books, stickers etc. on his site which helps pay for all of the stuff he does. A lot from other people too. Leo if you are reading this you would be very interested in the documentary Comprehensive Finanical Reports another good one but they are all worth watching many times over. He also is open about duplicating the movies and getting them out to as many people as possible.

He is using for sure Facebook but he has welcomed the Web 2.0 technologies so his articles etc. can be posted on the Web 2.0 sites. He also has grown his reporters to I think about 5 that write stories for him regularly. He is also building a TV studio to speed up making his own documentaries and help more documentary makers develop their films. Like Jason Bermas of Loose Change and Invisible Empire fame. Additionally he has grown his staff too.

I hear Alex has a big ego and he does tend to pat himself on the back a lot on his program. But the dude really deserves to do it some. He can be really sarcastic though when talking about the NWO and the shit is so comical especially when he talks in his funny voices. But he gets awesome guests like Max (monthly), Bob Chapman (weekly), Ron Paul (at least monthly) Gerald Celente, Dave Mustaine, Jesse Ventura, Charlie Sheen, Paul Craig Roberts, Joseph Stiglitz, politicians, economists, etc. gosh just so many. It's really fascinating to see the development of his show and the growth especially in this era of a mainstream media that doesn't talk about a lot of what Alex discusses.

Basically, there is Alex Jones, and everyone else. I guess I mainly mean in alt/underground radio. Jeff Rense' site is pretty damned good too and his radio guests are awesome. Topics from UFOs to finance to politics to Nikola Tesla. Great, great stuff. www.rense.com

I guess the reason I mention this is Alex has started posting many stories from Zero Hedge at his site. I think I learned of Zero Hedge from a Porter Stansberry e-mail but shortly after that, articles started being posted on www.infowars.com


Implicit simplicit's picture

Thanks for the RX Doc. I have saved them to my favorites.

Another guy that helps keep things in perspective is Hugh Smith over at "Of  Two Minds"


"Doom and gloom is only valuable if it works in a positive fashion to dispel and dismantle destructive half-truths, frauds, embezzlements, propaganda and misinformation designed to serve and protect the fiefdoms of the status quo."

TheGoodDoctor's picture

A side note about the DVD's for sale on Alex's site: Many of them are on sale right now for $5 and $10. You can get all 18 of his DVD's for $170. A real bargain if you ask me for the amount of information that you are getting. And most of his DVD's are over 2 hours. A couple clock in at 3 hours+. So, if anyone is interested in buying some, now is a pretty good time for deals on his site.


Another really good one is the DVD with interviews with Aaron Russo. Russo made some noise with his documentary America: Freedom To Fascism - which is awesome! He has some interesting info that one of the Rockefellers told him. Unfortunately Russo past away in 2007. A little known fact is that Russo invented bikini panties for women. And cross dressers. LOL. He should be given a Nobel Peace Prize just for that alone! :)

The dude lived an interesting life to say the least!


TheGoodDoctor's picture

Alex also said that Max is getting his own show on www.gcnlive.com I guess it is Saturdays at 9 AM Central. Should be good. I like that GCN Live has free archiving. I used to pay $10 a month for that for about 4 years or so. Then they made it free! Anyway archived for you listening pleasure.

I love when Max is on. He cracks me up. Especially the way he can't believe all the stuff that is going on.

Mr Lennon Hendrix's picture

How does Max have time for all his shows?  TV+Radio he has about a dozen!  Maybe he cloned himself?

TheGoodDoctor's picture

I don't know man. It sounded like his BBC show is no longer. But I am glad he is doing all his shows. I haven't watched a whole lot on his site but I have watched when people post links here to good video on Max's site (like Gerald Celente and Peter Schiff recently). I can't wait to see what he will do and what guests he has on the GCN Live show. Max has educated me a lot too.

OldTrooper's picture

I've wondered the same thing.  Max spends as much time on the air in a week as I spend awake.

TheGoodDoctor's picture

Also mentioned today was that Max was helping some (I think) French guy look into the puts that were on the airlines and other companies the day before 9/11 for some documentary the dude was making.

He also said that a FOIA request of this information from the SEC came back saying that this information had been "destroyed".

Max also stated that there was 2 million never claimed for some of the puts.

That's fucked up. Did ZH do a story on this FOIA request?

J K's picture

To simplify the equation: BP=TBTF!

GlassHammer's picture

So BK<BP because BP=TBTF?


GlassHammer's picture

So BK<BP because BP=TBTF?


Mitchman's picture

What could be more delicious than just before the midterm elections the US and English taxpayers bailing out BP!

williambanzai7's picture

Today's FNC=tomorrows BOW. Falling knife catcher/Bailout whore

Steaming_Wookie_Doo's picture

I think this is all a fabulous argument for wiping out all of this derivative dreck.

Mitchman's picture

+1!  You can bet the guys looking to wipe this garbage out in Europe are watching.

Implicit simplicit's picture

Here, here! I resemble with that remark.

Mercury's picture

I still believe that, BP, abetted by the UK government, will sell off non-US assets to tough bastard parties and dividend out the proceeds (or something) before they let UK investors go bust on BP's stock/bonds.

J K's picture

Those "tough bastard parties" might well include Petrochina, Gazprom or Petróleos de Venezuela.


Monkey Craig's picture

PDVSA has several things going against it:

I'm not sure if they can raise money in capital markets, they have very capital intensive operations, and for about a decade , the country has had significant brain drain from Venezuela to Houston, NY and Calgary. Not all of the Spanish speakers in these cities are Mexican. Some are highly paid engineers.

Mercury's picture

I was thinking more like China dumps some US Treasuries to finance the operation.

Double ouch.

I need more asshats's picture

Although they may indeed be moral bankrupt, they are no where close to being financially bankrupt.

Careless Whisper's picture

there's no need to worry about Bilderberg Petroleum. they're about to borrow about $50 billion from wall street (and possibly the federal reserve bank).  so the spill will cost them about $5 billion a year in interest for the next 20 years. not a big deal for them. plus with things in the middle east heating up, oil could easily go above $100/barrel.

HarryWanger's picture

BP will not go BK. Plain and simple. Maybe if they had 5 wells of this size simultaneously spewing millions of gallons, it would be a different story. Right now, they'll be able to handle this.

Mr Lennon Hendrix's picture

Psst...Harry....PMs making moves!

Mr Lennon Hendrix's picture

Psstt..psstt..psst!!!  Who's watching, who's watching!!!!!

Mr Lennon Hendrix's picture

Oh woah Platinum!  How do you say Capitulation in Mandarin and Cantanese?


DoChenRollingBearing's picture

Yeah, that was a hell of a spike up and right back down.

Kind of flash-crash like... 

How do you say Manipulation in Mandarin?

Mr Lennon Hendrix's picture

How do you say $100+p/b during a global depression in Mandarin?

Mr Lennon Hendrix's picture

And to whomever is trolling, chill out and eat a juice pop-sickle...

Wolfgang Amadeus Mozart - Symphony No. 25 in G minor:


frog's picture

uh, should I say God save the Queen, how much of BP she has ?

Atomizer's picture

Widows, Orphans and Maiden Lane Cruise Lines. The irony.


ratava's picture

BP is not TBTF. it is not a bank.

Mactheknife's picture

Ahhh, but here's the rub. If whoever sold all of that CDS protection on those CSOs and BP bonds is TBTF or otherwise well connected,(wink,wink) there might be a good chance that failure of those instruments might not be an option or otherwise allowed to happen. In which case, over the next month or so might just be a good time to buy BP. IMO, the only way BP starts to have an unmanageable problem is if oil gets back down to around 50 at the end of the summer. Which is a distinct possibility.

459F's picture

And here comes the hurricane.

From Acuweather:  Florida may be hit, depending upon what happens in the next few days.
Starts talking about Florida/gulf danger at about the 2:40 mark.

bugs_'s picture

Outstanding Tyler.  Thanks so much for showing us what may be the tip of another iceberg!

Incredible while at the same time so  believable.

Turd Ferguson's picture

Well, this is probably appropriate on this thread, too. 

BP is a goner. Sure as shit.


bugs_'s picture

OMG they better have freaking secret service protection on the relief well dude.

OMG they better have the freaking US NAVY protecting those relief wells.


jkruffin's picture

How about this beauty of news,  thanks Obama you freaking idiot, and your great health care reform plan that is a total failure.  These Congressmen need to be ousted, not just from the office, but from the country.



Mr Lennon Hendrix's picture

Wait, I don't have free Health Care yet?

Rut Roh!

<Sarasm roff>

Muir's picture



Everthing you ever wanted to know about CSOs (but were afaraid to ask)



Terri Duhon is vice-president of European synthetic structured product at JPMorgan Securities Ltd.



Synthetic products

The next leap forward in the development of the credit derivative product was its synthetic nature. Since credit derivatives are contracts and not cash transfers (that is, bonds or loans), dealers can effectively create credit risk synthetically. In other words, there is no need to own the loan or the bond. This synthetic creation of credit risk enables banks to structure tailor-made products for investors.

From the creation of synthetic risk, coupled with access to a wider range of credits, a wide spectrum of products evolved. A recent and innovative development is the managed synthetic securitisation, or the collateralised synthetic obligation (CSO) product. This product marries credit derivatives and traditional cash securitisation techniques. It allows investors to gain access to a diversified portfolio of credits where the default risk is managed by an experienced asset manager.

The primary feature of CSO investments is that they provide efficient access to leverage simply because there is no cash aspect to the underlying credit risk. The other valuable features of the product are based on the fundamental drivers of the credit derivatives market. In a traditional cash securitisation, a credit must exist in cash form (bond or loan) for the asset manager to add it to the portfolio. With a CSO, there is no need for the credit to exist in cash form. If the company exists, a credit derivative can be created on that name, in the exact maturity and currency that the CSO requires.

Tailored portfolios

Furthermore, the portfolio of credits can be tailored to the strengths of the asset manager as well as to the interests of the investors. If the asset manager has predominantly European credit expertise, the portfolio can consist of predominantly European credits. Similarly, if the investors are interested in five-year dollar-denominated investments, the CSO can produce a five-year dollar-denominated investment.

As the credit derivative market continues to grow and develop, more innovative products that are designed to address specific investor needs are expected to come into play. In the synthetic securitisation market, JPMorgan expects the base product for ongoing innovation to be the CSO.

Muir's picture

This announcement is brought to you by the Shimato Dominguez Corporation - helping America into the New World.

dark pools of soros's picture

how are any of these deemed a 'product'???!!!


Product means you PRODUCED something... even shit is more of a product than these financial viruses

Muir's picture

This announcement is brought to you by the Shimato Dominguez JPMorgan Securities Corporation JPMorgan Securities Ltd- helping America into the New World.

HFT1's picture

Let EM burn! I just paid $10 a lb for boiled shrimp.