BP Swaps Rise to Record at 35% Odds of Default: Credit Markets
June 15, 2010, 9:35 PM EDT
By John Detrixhe and Shannon D. Harrington
June 16 (Bloomberg) -- Credit investors are pricing in an almost 35 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 rising risk implied by credit-default swaps is up from 7 percent a month ago, according to the International Swaps and Derivatives Association’s standard model. BP swaps climbed 68 basis points yesterday to a record close of 506 basis points, CMA DataVision prices show. Investors are demanding 800 basis points more in yield to own BP debt due next year rather than Treasuries.
Pressure is building on BP with Chairman Carl-Henric Svanberg called to a meeting at the White House today to discuss setting up an escrow account to pay residents for damages from the accident. BP, which had $27.7 billion in cash flow from operations in 2009, was cut six levels to BBB from AA by Fitch Ratings because of mounting costs from the well that’s spewed crude into the Gulf of Mexico for eight weeks.
“There’s still so much uncertainty as to what ultimately the liability is and what the government is going to do,” said Jason Chen, a partner and head of research at hedge fund Sancus Capital Management in New York, founded in August by former JPMorgan Chase & Co. traders.
BP’s $750 million of 1.55 percent notes due in 2011 dropped 2.1 cents to 92.25 cents on the dollar yesterday, the lowest on record, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds traded the most ever, according to data compiled by Bloomberg.
Approaching Distressed
The securities, which traded as high as 101.2 cents in February, pay a spread of 804 basis points. That’s approaching distressed levels, which refers to companies in default or with relative yields of more than 1,000 basis points, or 10 percentage points.
Tristan Vanhegan, a spokesman for London-based BP, declined to comment on default-swap and bond prices.
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds instead of government debt was unchanged at 198 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 4.133 percent.
Teva Pharmaceutical Industries Ltd., the world’s biggest maker of generic drugs, tapped the bond market for the first time in more than four years, selling $2.5 billion of debt in three parts.
Proceeds from the offering by the Petah Tikvah, Israel- based drugmaker may be used to repay $800 million drawn from a line of credit in connection with its 2008 purchase of Barr Pharmaceuticals Inc. and to finance the acquisition of Ratiopharm GmbH, according to a prospectus filed with the U.S. Securities and Exchange Commission.
Phoenix Financing
Phoenix Group, the indebted drug wholesaler started by deceased billionaire Adolf Merckle, is close to obtaining as much as 3.6 billion euros ($4.4 billion) in financing, according to two people familiar with the negotiations.
Phoenix, based in Mannheim, Germany, may reach an agreement with banks by early next month on 2.6 billion euros in syndicated loans to refinance existing debt, said the people, who spoke on condition of anonymity. The company also has plans to sell as much as 1 billion euros in hybrid bonds, they said.
Bank of America Corp. plans to sell $1 billion of bonds backed by automobile loans as soon as this week, according to a person familiar with the offering, who declined to be identified because terms aren’t public.
Credit Risk
A benchmark measure of corporate credit risk in the U.S. fell for a fourth straight day, the longest streak since April.
The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 4.5 basis points to a mid-price of 118.6 basis points, the lowest since June 3, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 1.6 basis point to 127.75, Markit prices show.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 5 to 133 as of 8:40 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Greek Bonds
Credit-default swaps on Greece, which has the second- largest budget deficit in the euro region after Ireland, signaled a 48.5 percent probability of default within five years. The country’s credit rating was cut four steps to below investment grade on June 14 by Moody’s Investors Service, which cited “substantial” risks to economic growth from austerity measures tied to European Union and International Monetary Fund aid.
The cost of insuring $10 million of Greece’s bonds for five years jumped $55,500 to $811,000 a year, making the nation’s debt the third most expensive to protect after Venezuela and Argentina, according to CMA.
In emerging markets, the extra yield investors demand to own bonds relative to government debt fell for a second day. Spreads tightened 8 basis points to 314 basis points, the narrowest since June 3, according to JPMorgan’s Emerging Market Bond index.
Argentine warrants linked to gross domestic product rose to the highest price in a month as investors bet growth in South America’s second-biggest economy will trigger payments.
The dollar-denominated GDP warrants rose 0.1 cent on the dollar to 7.35 cents at 4:34 p.m. in New York, the highest since May 18.
Inverted Yield Curve
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 154 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.
Investors typically demand additional yield on shorter- maturity debt when risk is concentrated in the nearer term, causing the so-called yield curve to invert.
BP’s cost to clean up the spill may escalate enough to threaten the oil company’s future, said former Shell Oil Co. President John Hofmeister, who now runs the advocacy group Citizens for Affordable Energy.
“The current political movement by the U.S. government is basically an unlimited liability,” Hofmeister, who ran the U.S. operations of Royal Dutch Shell Plc, Europe’s largest oil company by market value, from early 2005 through mid-2008, said yesterday at a Bloomberg Link Boards & Risk Conference in Washington. “At some point the entity will have to defend itself.”
60,000 Barrels Daily
The BP well is gushing as much as 60,000 barrels of oil a day, the government said, raising for the fifth time an official estimate that had begun at 1,000 barrels a day in April.
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, according to a June 2 report from Credit Suisse Group AG.
Sewage, Disposal Facilities
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.
Yields on short-term bonds backed by BP to build sewage and solid-waste disposal facilities at a chemical plant in Will County, Illinois, and a refinery in Texas City, Texas, were as low as 0.5 percent at the beginning of the month. BP backs more than $3.5 billion of U.S. municipal obligations, according to Bloomberg data.
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.”
Transocean, Anadarko
Bonds of some companies associated with drilling and the spill may be attractive because their liabilities are more easily understood than BP’s, according to Chen. The leak began after an April 20 explosion on the Deepwater Horizon rig owned by Transocean Ltd. Anadarko Petroleum Corp. owns 25 percent of the well.
Anadarko’s $750 million of 6.2 percent bonds due in 2040 climbed 1.75 cents to 83 cents on the dollar, the fourth straight daily rise, Trace data show. The debt traded as low as 75 cents on June 9. Transocean’s $1 billion of 6 percent debt due in 2018 increased 1.56 cents to 88.1 on the dollar, the third consecutive daily increase.
“There is definitely a case to be made for going long select bonds of the peripheral Gulf spill names, like Transocean or other drillers,” Chen said. “Going long BP is a more difficult case to make because there’s no sense as to the ultimate liability amount.”
--With assistance from Jim Snyder in Washington, Abigail Moses and Sonja Cheung in London, Jody Shenn, Martin Z. Braun, Jim Polson, Janet Guyon and Bryan Keogh in New York, Aaron Kirchfeld and Angela Cullen in Frankfurt, Drew Benson in Buenos Aires, Ed Johnson in Sydney and Katrina Nicholas in Singapore. Editors: Alan Goldstein, Michael Weiss
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
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