Fitch cut BP’s credit rating a full six notches to BBB from AA on Tuesday.
The agency also set its rating watch on BP to ‘evolving’ from negative, as credit risks from the Deepwater Horizon spill remained unclear.
As the rating agency explained in its release:
The scale of today’s rating action has been partly driven by the increased risk that the balance between long-term and near-term cost payments may now be skewed much more heavily towards the near-term than previously anticipated by Fitch… In particular, the recent claims by U.S. state and federal authorities that BP escrow significant sums pre-emptively, ahead of any agreed claims process, represent a material change in approach, should it ultimately prove a legally supportable move against the company.
The principal changes in circumstances since Fitch’s downgrade to ‘AA’ RWN include: 1) the indication late last week from US government scientists of a significantly higher spill rate than previously announced by all parties, which Fitch expects will materially increase BP’s exposure to Justice Department fines payable in the near to medium-term, and 2) the significant step-up in action from the U.S. government surrounding calls for pre-emptive escrowing of damage claims. Both of these events have a direct bearing on BP’s fundamental financial flexibility.
This is a particularly key bit — risks over BP’s access to capital markets:
– Significance of Capital Market Access
The increased skewing of potential costs to the near-term is compounded by the limitations the severely adverse market reaction towards BP in recent weeks will pose to the company in accessing the full range of capital markets.
BP’s liquidity position as at the last investor conference call (4 June 2010) was USD5bn of available cash across the group, USD5.25bn of undrawn committed bank lines, and USD5.25bn of committed stand-by bank lines. Using Fitch’s forecasts, the group’s free cash flow before dividends for 2010 is USD6bn. This analysis does not include the potential to monetise existing assets.
In addition, Fitch would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident is clearer. The agency expects BP’s syndicated bank group to permit drawings under the group’s liquidity facilities (to the extent that they are contractually committed to provide funds) should BP choose to do so. Both of these actions would be supportive of the group’s liquidity position.
Fitch’s previous downgrade of BP on June 3 had been swiftly followed by actions from Moody’s and S&P.