BP Credit Default Swaps Show 39% Chance of Default; BP Announces $20 Billion Oil Spill Fund and Suspends Dividend; Gross Buys $100 Million of BP Debt

The credit markets suggest one thing but Bill Gross believes another.

Please consider BP Swaps Rise to Record at 39% Odds of Default.

Credit investors are pricing in a 39 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 default risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision. BP swaps climbed as much as 124.5 basis points to a record 630.6. BP debt due next year traded today at distressed levels, with investors demanding as much as 1,251 basis points in yield more than Treasuries.

BP’s $750 million of 1.55 percent notes due in 2011 rose 0.25 cent to 92.5 cents on the dollar as of 12:26 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, after earlier trading as low as 88 cents before news of the escrow fund. The bonds traded the most ever yesterday, according to data compiled by Bloomberg.

BP Sets Aside $20 Billion Fund for Oil Spill

Bloomberg reports Obama Says BP Agrees on $20 Billion Fund for Oil Spill.

President Barack Obama said BP Plc will put $20 billion into an oil spill compensation fund that will be independently administered by lawyer Kenneth Feinberg.

The amount available won’t be capped at $20 billion and BP as a “strong and viable company” will be required to pay all damage claims, Obama said at the White House. BP also has agreed to put another $100 million aside for oil workers.

“The people of the Gulf have my commitment that BP will meet its obligations to them,” he said.

Obama announced the agreement following a more than three- hour White House meeting between administration officials and company executives, including Chairman Carl-Henric Svanberg and Chief Executive Officer Tony Hayward.

BP suspends quarterly dividend

With costs mounting by the day BP agrees to suspend quarterly dividend

The chairman of BP's board said Wednesday that the oil company will suspend its quarterly dividend as part of its commitments to compensate victims of the Gulf oil spill.

BP Chairman Carl-Henric Svanberg made the announcement Wednesday after emerging from the White House where he and other BP executives met for four hours with President Barack Obama. BP shares jumped as Svanberg spoke and were up 3.6 to $32.53 in afternoon trading in New York.

BP said in a statement that it has canceled a dividend payment -- totaling about $2.6 billion -- scheduled for June 21 and that it won't declare a dividend for the second and third quarters.

Bill Gross Bets BP Survives

Calling BP a "Double-A" company PIMCO's Gross says bought $100 million of BP debt.

Bill Gross, the co-chief investment officer of PIMCO, said on Wednesday that he recently bought $100 million of short-maturing BP Plc notes and some Anadarko Petroleum paper.

He earlier told CNBC television: "BP 5-year bonds yield 6 to 7 percent, BP 12-month paper yields 10 to 11 percent. This is either a double-A company or a triple-C company depending upon the caps and the ultimate cost."

Gross said on CNBC: "At this point, if you can get 10 percent on one-year paper on BP, we think it's closer to double-A than triple-C. That's a significant (thing). We started to buy some."

Will BP Default Within a Year?

Even if BP is in serious trouble, I doubt it defaults in a year. Thus 10% returns seem quite attractive to me. 5-Year debt is more questionable and 6% does not seem that attractive.

Bear in mind, I do not trade fixed-income, rather my thoughts are based on what I perceive the risk-rewards to be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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