BP debt and shares in self-feeding downspin

By Alex Chambers

LONDON (BestGrowthStock) – Oil company BP’s credit default swaps (CDS) widened to levels associated with a “junk” rated company as its shares and bonds all deteriorated sharply in a self-reinforcing move.

Attacks on the UK oil company’s handling of the oil leak in the Gulf of Mexico by President Barack Obama have rattled both the credit and stock markets.

When European markets opened on Thursday, BP’s CDS shot wider on the back of a sharp fall in its shares, which then fueled another dive in its share price to a 13-year low.

The credit trading head of a U.S. bank described the price action in Europe as “a circular vortex.”

“Nothing is leading, its all correlated in the same direction. BP’s CDS and cash bonds this morning reacted to the stock’s move overnight,” he said.

The cost of insuring BP’s debt via credit default swaps (CDS) over five years widened by 195 basis points (bps) to 570 bps before recovering to around 500 bps, a trader said.

The oil company’s shares plunged. Its U.S.-traded shares were down nearly 16 percent overnight while its London-listed shares fell 11 percent in early trading to their lowest level since April 1997.

BP’s credit curve inverted sharply with its 1-year credit default swap trading at 800-900 bps, according to Markit, implying a higher probability of default in the short-term.

Moody’s Investors Services, Standard & Poor’s and Fitch Ratings downgraded their BP credit ratings last week and said they may cut the ratings again depending on the containment, litigation and clean-up costs related to the oil spill.

BP is rated Aa2, AA- and AA, respectively, by the three agencies, but the market is implying a BB “junk” credit rating, said Simon Ballard, credit analyst at Royal Bank of Canada.


“The worse price action has been in the U.S. where there was a sharp reaction overnight when we had gone home,” said the trading head.

All BP’s bond prices have fallen but its euro and sterling bonds are outperforming dollar bonds.

BP’s 4.5 percent euro bond due 2012 was 149 bps wider at 413 bps, according to Tradeweb.

“There is a theory that there has been some counterparty hedging (via CDS), but BP has relatively little loan exposure.

“People were sensing that it was possible to move the market and that’s what happened,” said the trading head.

BP moved to reassure investors on Thursday, saying that it saw no justification for the steep share price falls after the U.S. ratcheted up political pressure on the company.

“BP faces this situation as a strong company,” the company said in a statement, adding that the cost of the response effort to date has been around $1.43 billion.

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(Additional reporting by Natalie Harrison, Nigel Stephenson; editing by Simon Jessop)

BP debt and shares in self-feeding downspin