The cost of insuring debt issued by BP PLC (BP.LN) fell again Friday after the company filled its leaking oil well in the Gulf of Mexico with cement, successfully completing the latest stage of its "static kill" operation.
The cost of insuring debt issued by BP PLC (BP.LN) fell again Friday
after the company filled its leaking oil well in the
Gulf
of Mexico
with cement, successfully completing the latest
stage of its "static kill" operation.
The company's credit default swap spreads have tightened dramatically over the
last six weeks alongside progress on the Macando oil well, a trend that is
likely to continue as short-term uncertainties surrounding the ordeal are
eroded.
"I think CDS will continue to tighten as the company remains a single-A
credit over the longer term," said James Sparrow, a credit strategist at
the Royal Bank of Scotland Group PLC, pointing to the company's assets and
strong balance sheet.
At around 1120 GMT, the five-year credit default swap spread on BP was at 220
basis points, 14 basis points tighter from Thursday's close, meaning it now
costs an average of $220,000 a year to insure $10 million of debt issued by the
company, according to data-provider Markit.
BP's five-year CDS spread climbed to over 600 basis points in the middle and
end of June on uncertainties surrounding the financial liabilities related to
the leaking oil. Before news of the explosion at the Macando well came to a
head, the CDS level on the company was around 43 basis points in early April
and 51 basis points in early May, according to Barclays Capital.
The leak has proved to be the largest accidental oil spill in history,
releasing about 4.9 million barrels of crude into the
Gulf
of Mexico
, according to the
U.S.
government.
But analysts said the strong financial position of BP in the long term was
never a major concern and that shutting the well will remove the short-term
uncertainties that were responsible for the significant widening in its CDS
spreads.
As the final phase of the process is expected to be done by mid-August, the
company's CDS should continue to tighten.
"(BP) will continue to monitor the effectiveness of this [cementing]
procedure, and is still targeting mid-August for the completion of the relief
well, which will finally close the well for good," Sparrow at RBS said.
CDS are tradable, over-the-counter derivatives that function like a default
insurance contract for corporate debt.
If a borrower defaults, the protection buyer is paid compensation by the
protection seller. Swap buyers may be protecting investments they own or simply
making bearish bets against companies.
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