The first of many to come? The outlook would suggest so, after Fitch cut BP’s credit rating in response to its Deepwater spill dilemmas on Thursday — watch negative.
As Fitch’s release suggests, it’s a further headache for BP:
Fitch Ratings-London-03 June 2010: Fitch Ratings has today downgraded BP plc’s (BP) Long-term Issuer Default Rating (IDR) and senior unsecured rating to ‘AA’ from ‘AA+’, respectively, and placed the ratings on Rating Watch Negative (RWN). At the same time, Fitch has affirmed BP’s Short-term IDR at ‘F1+’. The ratings of BP Capital Markets plc’s senior unsecured issues, which are fully and unconditionally guaranteed by BP, have been downgraded to ‘AA’ from ‘AA+’ and placed on RWN. BP Capital Markets is BP’s wholly-owned indirect subsidiary.
The downgrade of BP’s ratings reflects Fitch’s opinion that risks to both BP’s business and financial profile continue to increase following the Deepwater Horizon accident in the US Gulf of Mexico. The company has so far repeatedly failed to stop the resultant oil leak and has instead reverted to containment methods that are yet to be fully implemented and are subject to potential weather related disruption. Fitch notes that the drilling of relief wells also poses risks and additional time may be required for them to be fully effective. An additional factor supporting the downgrade is the 1 June 2010 announcement by US Attorney General, Eric Holder, that both a criminal and civil investigation has opened with respect to the oil spill that could have potential negative implications for BP’s financial profile.
The placement of the company’s IDR and senior unsecured ratings on RWN reflects Fitch’s concern that BP is still facing substantial additional risks in relation to the oil spill. Factors that could lead to possible further downgrades of BP’s ratings include, but are not limited to, the actual oil well flow rate (as opposed to the US government’s estimated revisions) permanently increasing; the failure of the relief well currently being drilled by BP to completely arrest the oil flow from the leaking well in a timely fashion; and clean-up costs exceeding Fitch’s worst case expectations of around USD5bn in any one year.
Additional factors which also support the RWN include the possibility of US legislative changes that materially widen BP’s immediate payment responsibility beyond containment and clean-up (eg, long-term unemployment benefits to affected Gulf coast residents, job training and added costs of environmental tests beyond the USD500m already pledged by the company); the impact of any potential criminal charges filed against the company; and BP permanently halting drilling activity in the Gulf of Mexico.
Fitch’s understanding remains that, as 65% owner of the well, BP is primarily responsible for funding clean-up operations in relation to the Deepwater Horizon accident. Fitch continues to anticipate that these operations could reach costs of USD2-3bn in 2010 for the company, depending on how much oil eventually reaches the US shoreline. Fitch remains concerned that despite the current high oil price environment that supports the strength of the company’s balance sheet to finance the cost of the spill response, BP could face potential criminal or civil penalties. Specific negative rating action, however, would depend on the size and timing of these payments. On current assessments, Fitch believes that any further downward rating action driven by direct spill-related costs, were it to occur, would most likely leave BP within the ‘AA’ category. A substantially lower likelihood, in Fitch’s view, is the prospect of an immediate payment of adverse legal judgements against the company of sufficient magnitude to create a sustained impact on financial metrics to a level below that consistent with the ‘AA’ category.
As of Q1-2010, BP has USD6.8bn of cash on balance sheet and USD5.25bn in committed undrawn credit facilities versus short-term debt maturities of USD8.4bn (USD4.5bn of which are amortisations on long-dated revenue bonds and US prepaid natural gas transactions). Fitch anticipates that short-term debt maturities could be re-financed if necessary in order to free up additional funds for the clean-up operation which provides support to the current ratings. However, Fitch notes that BP’s credit profile could be negatively affected if the company significantly increases borrowings or significantly scales back investments in order to finance clean-up operations. The latter scenario could impact BP’s financial profile, whilst the former scenario could affect the company’s business profile.
No use crying over spilt ratings at this point, BP.
Spilt oil‘s another matter, of course.
Update (14:30 London time): Moody’s also issued a downgrade of BP’s ratings on Thursday, from AA1 to AA2. The agency warned of further possible cuts:
Moody’s decision to place BP’s long-term ratings under review for possible further downgrade is intended to enable a more complete assessment of the various scenarios the group may have to contend with in terms of the ultimate containment and clean-up costs, the allocation of liability for the Macondo accident, and mounting litigation exposure. Moody’s review will consider which steps management is able and willing to take in order to protect BP’s financial profile and flexibility, particularly in view of the mounting political pressures it faces from the US authorities, as well as the significant overhang of litigation exposure and financial liability that is likely to persist in the years to come.