BP Plc, the target of more than 220 lawsuits over the Gulf of Mexico oil spill, is seeking at least $5 billion in financing to meet compensation payments, according to two bankers approached by the company.
BP has asked lenders for one-year credit lines, one of the people said. It is arranging the transactions individually with banks, said the people, who declined to be identified because the talks are private. The financing is in addition to BP’s $10.5 billion of undrawn lines, the people said.
The funds may give BP additional flexibility if borrowing in bond markets becomes too expensive after the company’s debt was cut six levels to BBB from AA by Fitch Ratings June 15. The company had $27.7 billion in cash flow from operations in 2009.
“It’s surprising they have to resort to these measures given they could have funded this out of free cash flow,” said Mark Routt, a Houston-based senior consultant with KBC Energy Economics. “This is likely to be calculated to restore confidence in the market. Something had to be done.”
New financing could come in the form of $5 billion to $10 billion of corporate bonds, CNBC reported yesterday.
Bonds would spell “mixed news” for BP’s existing bondholders, according to Adam Cohen, founder of independent research firm Covenant Review in New York. Borrowing conditions allow new debt to be guaranteed by subsidiaries, ranking new bondholders ahead of existing noteholders in a default, Cohen said.
Sheila Williams, a spokeswoman for the London-based BP, declined to comment on financing arrangements.
BP’s existing bonds “are basically an IOU, with no guarantees from subsidiaries and no contract protections,” Cohen wrote in a note to clients yesterday.
BP’s senior unsecured ratings were cut three levels to A2, the sixth-highest investment grade, from Aa2 by Moody’s Investors Service today, which warned that further downgrades are possible. Standard & Poor’s yesterday cut BP’s long-term credit rating two steps from AA- to A.
The cost of credit-default swaps protecting BP’s debt for five years rose 5 basis points to 471.5, CMA DataVision prices show.
BP officials yesterday were questioned by a House committee probing the cause of the April 20 offshore rig explosion that killed 11 workers. The oil company sought to quell public criticism this week by abandoning a $10 billion-a-year dividend and creating a $20 billion escrow fund to compensate victims. Spending for cleanup and liabilities may cost BP $40 billion, Standard Chartered Plc estimated last week.