Fitch says widening in BP’s CDS overdone

Posted June 16, 2010 at 10:20 a.m.

Reuters | Fitch Ratings said that the dramatic widening in BP Plc’s credit default
swaps had been overdone, but its downgrade was justified as the risk
facing the firm was greater than for others in the AA category.

On a teleconference call held for investors on Wednesday the rating agency said that its sharp six-notch downgrade from AA to BBB on Tuesday had been based on the uncertainties facing BP, specifically the costs associated with its oil spill clean-up.

On Wednesday, five-year CDS on BP hit another record high of 610 basis points, 115 wider on the day, according to Markit.

“We think the CDS market is overdone hence our decision to shift rating to BBB,” said Jeffrey Woodruff, senior director in Fitch’s EMEA Energy team and lead analyst for BP.

The oil company has faced calls by U.S. legislators to post $20 billion into an escrow account to pay for the clean up bill of its Gulf of Mexico oil well.

“A lot is incorporated in the BBB rating,” said Richard Hunter, Fitch’s head of corporate finance for EMEA & Asia Pacific.

He added that BP faces an increasingly hostile political environment and that the rating agency does not anticipate quick answers to BP’s answers.

“Our ratings have to be real-time and forward looking,” said Hunter.

Fitch said that a quick resolution of the potential clean up costs could lead to a rating upgrade.

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