For BP, the structured finance fallout has just sprung.
On Monday, Moody’s published a note on the 117 Collateralised Synthetic Obligations (CSOs) which reference CDS on BP. In other words, synthetic CDOs with exposure to the British oil giant.
If BP were to declare bankruptcy or some sort of debt restructuring, that could trigger a credit event for the CSOs. The CSO transactions would have to pay out to CDS protection buyers which could lead to losses for the CSO investors if there’s not enough padding (subordination) left in the deal.
Here’s what the rating agency says:
We reviewed our entire universe of outstanding CSOs and determined that exposure to BP and its rated subsidiaries appears in 117 (excluding CSOs backed by CSOs) transactions, which represents approximately 18% of global Moody’s-rated CSOs. Exposure ranged from 0.26% to 2% of the respective reference portfolios. The transaction with the largest exposure to BP and its subsidiaries is Arosa Funding Limited – Series 2005-5.
Restructuring or Bankruptcy of Other Oil Companies Involved in the Spill Also Affects CSOs.
In addition, we assessed Moody’s-rated CSO exposure to the other four companies and their subsidiaries that were involved in the Gulf of Mexico incident, which are Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International. Halliburton appears in 43 CSOs, Anadarko Petroleum appears in 28 CSOs, Transocean Inc. appears in 79 CSOs, and Cameron International appears in 6 CSOs. We recently changed the credit outlooks for Transocean and Anadarko Petroleum, as well as their rated subsidiaries, to negative from stable because of uncertainties related to the companies’ involvement in the Gulf of Mexico incident and potential financial liabilities associated with it. The CSOs referencing one or more of these issuers would face credit event consequences in a scenario where any of them restructures or enters bankruptcy.
The exhibit below lists CSOs (excluding CSOs backed by CSOs) with over 3% exposure to the five companies involved in the Gulf of Mexico incident.
CDS on other companies will of course, also be referenced in the deals.
Arosa Funding Ltd 2005-5 for instance, probably, like its Morgan Stanley-arranged predecessor, referenced a number of investment-grade corporate credits. The worry is that an impairment in the CSO, leading to forced liquidation, might also affect other companies CDS too.
This bit of commentary, from financial blog Zero Hedge, is currently doing the rounds in London:
Last week’s blow out in BP spreads, in which the 1 Year CDS surged beyond 1,000 bps, has got many people concerned: the least of which are counterparties that are on the other side of the short risk trade. Others include investors in just CSOs, and other companies whose CDS comprises various tranches in these synthetic obligations, as forced liquidations in any given CSO would result in the blow out spreads in even perfectly solvent companies who just have the displeasure of being packaged in one and the same CSO.
In other words, CDS death by (collateralised) BP association.
Related links:
BP – a line in the sand? – FT Alphaville
BP has nothing to fear… – FT Alphaville