BP plc (BP) has been nothing short of a disaster. It seems that if anything can fail or go wrong with the disaster recovery, then it goes wrong and gets even worse. But things are getting worse for the company. While it still seems impossible to fathom a credit default from the likes of a BP, the cost to insure BP debt against default is rising.
The credit default rates appear to have hit an all-time high Wednesday now that the DOJ has opened up criminal investigations into BP over the Gulf of Mexico’s oil spill. So far, all efforts have failed to slow the flow, or stop the flow of oil. If the credit default swap rate has risen on covering BP, then Halliburton Co. (HAL) and Transocean Ltd. (RIG) can’t be too far behind.
The credit default swap has moved above 200 basis points. With yesterday’s stock drop that is not unexpected, but the rate at which it costs is a growing concern. That is a high spread considering its solid investment grade from ratings agencies and considering that finding anyone with balance sheet knowledge calling for a default is non-existent.
If you throw a dart at the percentages, that implies that there is close to a 15% probability of default being priced in over the next five years. Still a very high spread. Before BP’s Deep water Horizon catastrophe, BP’s credit default swap rate was under 50 basis points. It has just been in recent days that the rate went sky high. Where these default swap rates go is anyone’s guess. These change minute to minute just like the stock price, but the difference is that the CDS market is far less liquid and far more volatile.
In short, it now costs over $200,000 per year to insure $10 million worth of BP debt. BP’s ADR shares are trading up over 2% at $37.35, but shares were close to $62 before this whole mess started. All of this is also before a single court case has gone against BP. Even if the stock seems oversold, BP’s financing costs are going to be higher along with its massive clean-up costs.
