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S&P Downgrades BP To A/A-1 From AA-, On Watch Negative
Overview
- Higher oil leak estimates resulting from the subsea explosion at BP's Macondo well in the Gulf of Mexico and questions raised during a U.S. Congressional hearing are, among other things, increasing our estimated short- and long-term potential liabilities for BP PLC.
- BP, a U.K.-headquartered oil major, is reportedly to contribute $20 billion of assets to a specially established claims fund, although these payments do not amount to a cap.
- We are lowering our long- and short-term corporate credit ratings on BP to 'A/A-1' from 'AA-/A-1+' and keeping them on CreditWatch negative.
- The ongoing CreditWatch placement reflects our view of the continued uncertainties affecting BP, rapid evolution of the situation, and our reassessment of the longer-term impact of the explosion and spill on BP's business.
Rating Action
On June 17, 2010, Standard & Poor's Ratings Services lowered its long- and short-term corporate credit ratings on U.K.-headquartered oil major BP PLC to 'A/A-1' from 'AA-/A-1+'. The ratings remain on CreditWatch, where they were
placed with negative implications on June 4, 2010.
Rationale
The downgrade reflects our opinion of the challenges and uncertainties that BP continues to face in the aftermath of the explosion on the Deepwater Horizon rig in the Gulf of Mexico on April 20, 2010, and the subsea Macondo well blowout. These challenges and uncertainties include the difficulties BP is experiencing in containing the spill as well as the ultimate extent of the pollution, the consequences for BP of ongoing official investigations, and the implications of these investigations for the magnitude and timing of further cash payments by BP. BP is now subject to intense political pressure in the U.S., its largest market. We see these factors as fundamental issues differentiating BP from its peers.
BP reported net debt of $25.2 billion as of March 31, 2010 ($45.2 billion pro forma when we include the $20 billion claims fund commitment announced on June 16, 2010).
BP has reportedly agreed to make $20 billion of phased payments into a specially established claims fund over the next three–and-a-half years. At the same time, BP has reportedly agreed to increase its cash resources and to this end has agreed to suspend dividend payments ($10.5 billion in 2009), reduce capital investments ($20 billion projected for 2010), and accelerate asset disposals. On their own, we view these steps to increase cash resources as credit supportive although, in the circumstances, we are of the view that their benefit is less significant than the negative effect on credit that has arisen.
Official estimates of the Macondo oil spill have been successively and materially revised upward. On June 16, 2010, the official estimate by the U.S. Coast Guard rose to between 35,000 barrels and 60,000 barrels per day. Despite claims that some 90% of the spill could eventually be collected on a continuing basis, the leakage remains significant. Given the approximately $1.7 billion spent to date by BP on remediation costs, we see the estimates of the likely range of direct (containment and clean-up) costs at $4 billion to $6 billion as manageable for BP. However, we note that the magnitude of the pollution could result in fines under applicable law that are a multiple of this range, albeit subject to settlement. In our view, other fines, penalties, and litigation could add significantly to the costs likely to be borne by BP over the next several years.
Data provided to the U.S. Congressional hearing co-chaired by Representative Henry Waxman raises, in our view, important questions for BP. Moreover, if BP's acts or omissions are found to have contributed to the incident, such
factors would likely increase the size of BP's liabilities. We also note that BP's production growth could be materially hampered as a result of negative business and regulatory perceptions.
The $20 billion that BP will contribute to the claims fund over time is reportedly intended to prefund civil damage and litigation claims, but apparently would not address fines or penalties. BP reportedly agreed to the claims fund with a view to addressing widespread concern from potential claimants about the speed at which their claims will be assessed and paid. In our opinion, these concerns have contributed to burgeoning political risks in recent days, increasing speculation about the size and timing of a large lump-sum prepayment. From a corporate credit perspective, we note that the
phased stream of BP's cash funding under the escrow agreement and the compensatory actions taken by BP could partially mitigate the effect of those payments on its balance sheet.
As a consequence, we have revised our assessment of BP's business and financial risk profiles to "strong" and "modest," respectively, from "excellent" and "minimal." This reflects our view that the materiality of the uncertainties and challenges currently facing BP distinguish it from its peers, whose very significant underlying strengths--including huge global cash-generative upstream activities--it otherwise shares.
Under our $70 per barrel near-term credit oil price assumption, we currently estimate BP's adjusted funds from operations (FFO) to debt to be well below 50% in 2010 and that BP's discretionary cash flow (after contributions to the claims fund and taking account of reduced dividends) will likely break even in 2010. Currently, we are of the opinion that the appropriate forward-looking FFO to debt level (including the $20 billion escrow commitment) will likely be between 40%-50%. While probably outside these rating assumptions for the 'A' level in the near term, we believe that BP's financial flexibility, including potential asset disposals, supports the rating at its current level.
Liquidity
We view BP's liquidity as adequate. In our analysis, BP's cash balances, operating cash flow generation, and bank lines should collectively be sufficient to meet liquidity needs. Calls on liquidity will likely include significant amounts of BP's maturing short-term debt, funding amounts for BP's remaining committed acquisitions, ongoing direct oil-spill costs, the escrow payments described above, and what we view as manageable collateral posting requirements. We believe that BP's near-term financing needs are covered by committed bank lines of more than $10 billion, which would likely obviate the need for BP to turn to the capital markets at a time of stress. We understand from BP that its loan documentation does not include any significant repayment triggers.
Following BP's announcement that it intends immediately to suspend dividends in an amount of $7.5 billion and to reduce capital investment in 2010, operating cash flow should, in our view, broadly cover both escrow funding of $5 billion as well as much of its clean-up costs. The timing of the asset disposals indicated by the company will determine the extent to which total committed acquisitions ($8.9 billion as of mid-April) result in drawings on liquidity resources.
At the end of March 2010, our estimate of BP's surplus cash balances before acquisitions was $5.3 billion, with reported cash of $6.8 billion. Committed undrawn credit lines were $5.25 billion, most of which mature in late 2011, although a small tranche matures in 2013. BP has subsequently agreed additional committed lines totaling more than $5 billion. Short-term debt fell to $8.4 billion on March 31, 2010, from $9.1 billion a year earlier. We understand from BP management that BP has only a modest par amount of commercial paper outstanding and that by mid-June BP repurchased most of its $4.5 billion long-term revenue bonds and U.S. prepaid natural gas transactions.
CreditWatch
We will review the CreditWatch placement after further discussion with BP's management. As part of the review, we will consider scenarios factoring in likely higher costs and possible future crystallization of settlement and other payments. Potential liabilities will continue to mount as long as the pollution flow continues.
We will continue analyzing both BP's financial and business risk profiles, and refining BP's financial parameters for its ratings, in the context of its business risk.
We believe certain near-term uncertainties have been addressed by the agreement with the U.S. government of June 16, 2010. However, because of the rapidly developing situation, forthcoming hurricane season, and general uncertainty about the situation, we cannot rule out further rating adjustments at this point.
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No worries - the PPT is going to make sure we close in the green today!
So it's all good. Get back in those stores and buy those iPoops, sheeple.
Try junk, S&P. Get ahead of the pack for once.
s & p still has the rating 2 notches above fitch's. don't you think they can package some fancy looking collateral and unload it? if not don't you think ben will print some benjamins and secretly add this crap to the fed portfolio?
There is a buyer for anything at the right price and that is how it will go.
And no, I don't think the Fed will add BP corporates to the balance sheet. The Bank of England might, though.
Why is the stair-step down so important.
We all know they might as well be rated DDD.
(Please someone post below the obligatory DDD-cup picture.)
( . )( . )
BP is last week's news. We're in the new bull market again! That oil spill will help the economy like you wouldn't believe. More jobs for clean up. More materials for clean up. More, more, more of everything! Thank you BP for creating this huge spill and saving our economy at the same time!
Well that was a pretty good ramp job into the close. Buying puts on the SPY since it rebalances tomorrow. Nearly 60 cents above its NAV.
Stupid & Pussies, please down grade BP to BBB so that their stock goes up 50%.
wow look at Skynet go...weeeeeeeee
And then there is this: