June 9 (Bloomberg) -- The cost to protect against a default on BP Plc debt soared to a record and the energy company’s bond prices plummeted after an estimate its damaged well is seeping more oil than previously calculated. Shares fell to the lowest since 1996.
Credit-default swaps on BP debt rose 126.8 basis points to an unprecedented 387.6 basis points, according to CMA DataVision. The company’s $3 billion of 5.25 percent notes due in 2013 fell to a record low 91 cents, raising the relative yield to 7.18 percentage points, compared with 7.27 percentage points on the average junk bond as of yesterday.
“The piece of news that seems to have broken the camel’s back was an increase of estimated spill volumes,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.
BP’s securities were hammered after Ian MacDonald, an oceanographer at Florida State University in Tallahassee estimated the well is leaking 26,500 barrels to 30,000 barrels a day into the Gulf of Mexico, six times more than the figure used by BP and the government from April 28 to May 27.
BP’s American depositary receipts fell $5.48, or 15.8 percent, to $29.20, in New York Stock Exchange Composite trading.
President Barack Obama said yesterday that he would have fired BP Chief Executive Officer Tony Hayward for saying that he wanted to end the leak because he wanted “his life back.” Obama said he has made three trips to the Gulf to find out who to hold responsible, “so I know whose ass to kick.” Lawmakers led by Representative Peter Welch, a Vermont Democrat, wrote to Hayward urging him to stop paying dividends and cancel an advertising campaign in the U.S. until the cleanup is complete.
‘Flak From Politicians’
“They’re getting a lot of flak from politicians, and that’s raising concerns about the dividend,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “Operationally, they seem to have turned the corner.”
The BP notes fell 7 cents to a yield of 8.34 percent as of 4:18 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with 9.44 percent for high-yield, high risk corporate debt as of June 8, according to Bank of America Merrill Lynch index data.
The BP debt is rated Aa2 by Moody’s Investor’s Service and AA- by Standard & Poor’s. Junk bonds are rated below Baa3 by Moody’s and lower than BBB- by S&P.
Investors should be “underweight” the oil and gas sector, a change from “marketweight,” Lebas wrote in a June 7 report. BP, The Woodlands, Texas-based Anadarko and Vernier, Switzerland-based Transocean bonds have been “punished” because they are the most exposed to the liability from the spill, he wrote.
Anadarko’s $1.75 billion of 6.45 percent bonds due in 2036 fell 5.75 cents to 76.5 cents for a yield of 4.63 percentage points more than similar-maturity Treasuries, Trace data show. Credit-default swaps on Anadarko debt increased 152 basis points to 589.7 basis points. Anadarko fell $7.97, or 18.6 percent, to $34.83 in New York Stock Exchange Composite trading, the lowest since March 2009.
Transocean’s $1 billion of 6.8 percent securities due in 2038 dropped 3 cents to 82 cents, for a spread of 4.39 percentage points, and credit-default swaps on its debt rose 126.8 basis points to 533.3 basis points. Its stock dropped $3.75, or 8.1 percent, to $42.58, the lowest since December 2008.
BP is drilling relief wells to end the leak, with completion set for August, Lebas wrote. Even with assurances from the company and public officials, the damaged well may continue to discharge into the Gulf, he wrote.
Max McGahan, a BP spokesman, declined to comment. Officials from Transocean and Anadarko couldn’t immediately be reached for comment.
Volatility in BP bonds may have been exacerbated by traders unwinding credit-derivatives strategies linked to the company, Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, wrote in an e-mail.
Credit 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.
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