Pershing Square Capital Wagers Against BP Debt With Credit-Default Swaps
Bill Ackman’s Pershing Square Capital Management LP is betting against the debt of BP Plc through credit-default swaps, saying the energy company’s creditworthiness will be dented for years by the biggest offshore oil spill in U.S. history.
The accident has “likely permanently impaired the ability of BP to operate effectively in the U.S.,” Ackman wrote today in a letter to investors obtained by Bloomberg News. “The clean-up costs, penalties, and legal liabilities of the spill will continue to impair the company’s credit for many years.”
Pershing, which made more than $1 billion in 2008 betting against bond insurers through credit swaps, began buying protection in May against London-based BP defaulting on its debt, the month after a rig explosion in the Gulf of Mexico triggered the spill.
Ackman, who initially paid 60 basis points a year to protect the debt, is now paying an average cost of 280 basis points a year, according to the letter, which was posted earlier by financial news website Dealbreaker.com. Ackman didn’t immediately return a call for comment. Scott Dean, a BP spokesman, declined to comment.
Credit swaps protecting against a BP default for five years soared to at least 631 basis points on June 16 from 42 basis points the day before the rig explosion, according to data provider CMA. That cost has declined to 255 basis points after BP sealed the well that spewed an estimated 4.9 million barrels of crude into the Gulf of Mexico.
At their peak, the contracts were pricing in almost 40 percent odds the company would default within five years, CMA data show.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
“We believe it is unlikely that credit spreads will return to the pre-crises levels for many years, if ever,” Ackman wrote.