We are concerned that the slow pace of incremental liquidity secured over recent weeks by BP may be seen as a negative market signal that reflects growing concerns amid bank groups and uncertainty over BP's ability to finance potential liabilities. Declining bond prices for BP issues and widening spreads for credit default swaps signal credit market concerns, as do recent credit rating downgrades. Five-year credit default swap spreads on BP have recently recovered but are still high at over 500 basis points, which indicates the market is trading the bonds in line with single-B rated credits.
These credit market concerns may have prevented earlier efforts by BP to secure new bond financings, thus reducing the firm's funding options to bank lines or equity-linked transactions. BP has unencumbered assets that it could use to pledge as collateral for financing, but this could send a negative signal to credit markets that the unsecured market is closed to BP.
In our opinion, BP should be considering a financing large enough to put any jump-to-default fears to rest. We would not be surprised to see BP announce an equity-linked transaction in the near term--possibly a convertible bond deal--that would be sold to an investor that does not have to worry about mark-to-market risk, such as a sovereign wealth fund. If BP were to complete such a transaction, we would expect credit spreads to improve, though any equity-linked transaction would be dilutive to current shareholders.
Morningstar has a fair value estimate of 458p and a 'very high' uncertinaty rating. Read more here.
