Tuesday, June 15, 2010

More $BP Problems

By Liam Denning A DOW JONES COLUMN An aide to President George W. Bush once said "we create out own reality." When it comes to BP, the administration of his successor displays similar power. BP was dealt a six-notch downgrade to its credit rating by Fitch Ratings Tuesday. Fitch couldn't immediately recall the last time a large non-financial company had suffered such a deep one-time cut. A primary reason was calls by U.S. politicians that BP escrow $20 billion preemptively for claims arising from the Deepwater Horizon disaster. Fitch is concerned this could shift expected disaster-related cash outflows nearer-term. Yet Fitch acknowledges that the escrow plan may not even be "legally supportable." This legal uncertainty echoes that surrounding earlier political demands, such as that BP pay oil workers idled by the deepwater drilling moratorium or suspend dividend payments. In their desire to be seen to do something, politicians risk compounding the current crisis. Given its cash-flow and assets, BP should be well able to foot the bill for its disaster. Yet uncertainties stoked by a drip-feed of political pronouncements weigh on the market. Credit-default-swap premiums for insuring BP's debt against default jumped again Tuesday, from 4.24% to 4.95%, according to Markit. The number of CDS contracts on BP's debt remains small, with just 1,718 in the Depositary Trust and Clearing Corporation's database. But as the recent financial crisis shows, movements in CDS prices can send signals that affect companies' stock prices and, ultimately, liquidity. In demanding that BP set aside funds for reparations in the unlikely event that it would struggle to pay, Washington risks creating the conditions that could lead to that very outcome. (Liam Denning joined The Wall Street Journal from the Financial Times, where he wrote for the Lex column. Previously, he was an investment banker at Goldman Sachs. He can be reached at 212-416-3618 or by email at liam.denning@wsj.com) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/nae/al?rnd=uPISDq3EDp4R1cUHwmqBoA%3D%3D. You can use this link on the day this article is published and the following day. (END) Dow Jones Newswires 06-15-10 1459ET Copyright (c) 2010 Dow Jones & Company, Inc.

No comments:

Post a Comment