Tuesday, June 22, 2010

"BP Bonds Ooze Value" and "BP Bankruptcy Filing Would not Trigger Cross-default of Bonds" (BP)

UPDATE: "BP: "Incompetence, uncertainty and risk" (among securities analysts)"

As I said in the May 27 post "Trading on the ‘Top Kill’: Analyst Thoughts" (BP; RIG):
The stock is up $2.75 at $45.16 and I wouldn't touch it with your money. Fiduciary blah blah, Prudent Man, raw terror etc.
Personally we're partial to the play in "Website Offers Betting on Spill-Related Extinctions of Gulf Species "....
That was repeated on June 8, in "Imagining the Worst in BP’s Future" with the stock at $35.27.
Today it closed down 4.50% at $30.33 and within striking distance of the panic low of $29.00 on June 9.
The debt however...
First up Barron's Current Yield column:

Despoiled BP's bonds are a buy for the brave.
ARE THE BONDS OF EMBATTLED BP A BARGAIN? At current levels, yes -- if you can stomach volatility.
Barron's was -- ahem -- early in making the case for BP's stock, which has lost nearly half its value since the oil starting spilling into the Gulf of Mexico on April 20. (For a more recent valuation of BP shares, see "Other Voices.")

But no less a bond authority than Bill Gross sees opportunity in its debt. A Pimco spokesman confirmed reports that Gross recently bought $100 million of BP's shorter-maturity bonds.

No wonder, given that the oil giant's yield curve has inverted. The yield margin on its 1.55% notes due 2011 blew out to 12.58 percentage points above Treasuries last Wednesday, before a huge victims' escrow fund and BP's dividend cancellation were announced, and as the president and Congress skewered BP's management.

The political risk looked so great that there were fears "the company would take its chances in bankruptcy" instead, says Philip Adams, analyst at Gimme Credit, who has an Outperform rating on BP's debt. "But there was a compelling reason for the president and BP to do business," he adds. It was to give BP the breathing room to help disaster victims by letting it fund $20 billion requested by the White House in escrow over 3½ years.

Not to mention that 23,000 of BP's 80,000 employees are Americans.
The 1.55% notes had improved substantially by Friday, quoted at 5.11 percentage points over Treasuries. Before the spill, however, they traded at 0.05 to 0.09 percentage point below the two-year T-note. That's right, the yields were quoted inside the Treasury benchmark. At the long end, by comparison, BP's 4¾% due 2019 early Friday were at 3.70 percentage points over Treasuries.
BP's credit-default swaps also blew out last week. At their worst, they were quoted at 620.3 basis points, meaning the cost of protecting $10 million of the company's debt annually for five years was $620,300. They were quoted Friday in the mid-400s.

"The continued failure to stop the leak, combined with [BP's] apparent [primary] control of the drilling of the well, substantially increases liability," wrote analysts at independent rating agency Egan-Jones in a note Friday, when it cut its rating on BP two notches to triple-B-minus -- just above junk. Fitch last week spanked the company's rating by six notches, also just above junk. Moody's and S&P piled on.
Yet the company still has admirers.
BP's standby loan has grown from $5.25 billion on June 4 to $7 billion, as friendly lenders sought to provide it shelter against possible claims, Dow Jones Newswires reported Friday.

While its liabilities aren't capped at the $20 billion amount in escrow, the company is a cash cow, notes Egan-Jones. It has cash of $7 billion, interest coverage of more than 25-to-1, and a market capitalization of $93 billion. It has debt of $31 billion. Operating income for the first quarter of this year was $5.3 billion, up from $2.5 billion a year ago, while interest expense fell to $153 million from $257 million.

BP allegedly made some "pretty horrific mistakes" if it indeed cut corners in its operations, says Adams of Gimme Credit, citing a May 27 Wall Street Journal article. "Let it make restitution, but don't kill it.",,,
And from Research Recap:
A bankruptcy filing of BP’s (BP) U.S. entities would not trigger a cross-default under BP’s bonds, according to Covenant Review, an independent credit research firm.  “BP bondholders would wait to collect interest and principal as it becomes due in that case,” says Adam Cohen, Founder of Covenant Review.
Covenant Review recently developed two papers addressing questions about BP’s capital structure, potential criminal and civil liabilities and various bankruptcy scenarios.
  • It seems that BP has unlimited flexibility under its various bond indentures to incur debt to finance civil liabilities, cap ex, acquisitions, and / or future dividends.  Additionally, BP’s various bond indentures do not have any type of liens covenant or negative pledge, so it could incur any incremental debt on a guaranteed and secured basis, which could reduce the value of the existing BP debt.
  • Similarly, BP’s debt agreements do not contain restrictions on selling assets, and thus BP could freely sell assets to finance any of the above obligations.
covenant reviewA bankruptcy filing of BP’s U.S. entities would not trigger a cross-default under BP’s bonds.  BP bondholders would wait to collect interest and principal as it becomes due in that case.
  • We have also included some preliminary thoughts on: (1) Arco, a BP subsidiary that has its own bonds outstanding; (2) Transocean (RIG), the owner of the Deepwater Horizon rig, and its capital structure; and (3) Anadarko (APC), which has a 25% non-operating interest in the Macondo Well where the Deepwater Horizon was located.
For details see BP & Friends: Answering Common Capital Structure and Legal Questions and BP & Friends Follow-up (complimentary).
That's our second link to Research Recap in 24 hours. When he gets on a roll, good stuff.

Finally, from MarketWatch: "Oil major said to be planning $10 billion bond offering"

June 16: "A Real Worst-Case Scenario for BP: 20m barrels, $560 Billion Damages" (BP)"
June 16: "BofA Reported to Rein In Its Oil Trades With BP" and BRITISH Analyst Downgrades to Sell (BAC; BP)"
June 15: Barron's Tiernan Ray Gets the Goods on Matt Simmons Thinking Re a BP Bankruptcy (BP)
June 10: "Is BP worth $90 a Share or $0 a Share?" and "10 Thoughts for Those Buying (or Selling) BP"
June 10: "J.P. Morgan on BP Share Price: ‘Has Overshot a Worst Case’" (BP)
June 9: "BP Panic: Relax, Firm Can Cover the Clean-up" (It's the lawsuits that might do 'em in) BP
June 9: "British Petroleum: A Month From Chapter 11? (BP)
See also:

"Years of Internal BP Probes Warned That Neglect Could Lead to Accidents" (BP) 
"Imagining the Worst in BP’s Future" 
British Petroleum Patents Blowout Preventer Testing Method and Makes no Promises on Dividends (BP)"
BP’s would-be takeover scenarios" (BP; PTR; RDS.A; XOM)
J.P. Morgan Comments on British Petroleum (BP) 
British Petroleum Stock Spanked on 'Top Kill' Failure. Arbuthnot Securities Questions Survival (BP)