Fitch again slashes BP’s ratings as ‘US steps up action’

15 June 2010 14:31  [Source: ICIS news]

TORONTO (ICIS news)--Fitch on Tuesday once again cut its ratings for BP, citing much higher near-term financial risks for the company from the US Gulf coast oil spill than previously expected, as well as increasing pressure from the US government.

Fitch downgraded BP’s issuer default rating (IDR) to BBB, from AA, and the short-term IDR to F3, from F1+, it said. The move comes after Fitch on 3 June already cut the IDR to AA, from AA+.

The main drivers for Tuesday’s “multi-notch downgrade” included the indication late last week from US government scientists of a significantly higher spill rate than previously announced by all parties, Fitch said.

A higher spill rate would materially increase BP's exposure to US Justice Department fines payable in the near to medium-term, the agency said.

Equally important was “the significant step-up in action from the US government surrounding calls for pre-emptive escrowing of damage claims,” Fitch said.

“Both of these events have a direct bearing on BP's fundamental financial flexibility,” the agency said.

The credit rating agency said potential financial impacts of the spill on BP could be broadly grouped.

First, immediate ongoing direct clean-up costs and claim settlements. BP’s latest estimates were in the range of $3bn-$6bn (€2.5bn-€5bn), Fitch said.

Second, near- to medium-term civil fines related, in part, to the scale of the oil flow rate.

On this count, Fitch estimated that BP could face payments in the range of $2bn at the lower end, right up to around $8bn at the upper end.

Third was the medium-term wider financial impact on BP's operations, including higher operating costs and lower revenues from the loss of access to projects following reputational damage, Fitch said.

And, finally, BP was facing long-dated litigation-related damages, Fitch said.

Fitch said it anticipated that long-dated litigation-related damages would be subject to lengthy court proceedings and, given the precedent of Exxon Valdez, large amounts would be payable and contested over many years.

However, given the “fluidity of events” and the high level of uncertainty, payments could turn out to be much lower, or they may be skewed more towards the longer-term, the agency said.

Fitch also said it would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident was clearer.

Nevertheless, Fitch did not anticipate that the oil spill would translate to “worst case scenarios - including the placement of parts or all of BP into insolvency or restructuring proceedings,” it said.

BP remained one of the world's largest oil companies, and one of the world's most profitable industrial companies overall, with substantial embedded value, and high levels of flexibility in selectively managing its asset portfolio - all of which supported continued access to bank financing, the agency said.

($1 = €0.83)

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By: Stefan Baumgarten
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