The Wall Street Casino is betting on a BP bankruptcy

[marmar]

BP Swaps Rise to Record at 39% Odds of Default: Credit Markets
By John Detrixhe and Shannon D. Harrington


June 16 (Bloomberg) -- Credit investors are pricing in a more than 39 percent chance BP Plc will default within five years as it tangles with the Obama administration over cleanup costs and claims for the biggest oil spill in U.S. history.

The risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision. BP swaps climbed 112 basis points today to a record 618. Investors are demanding 800 basis points more in yield to own BP debt due next year rather than Treasuries.

President Barack Obama is increasing the pressure on BP, criticizing its “recklessness” in an address from the Oval Office yesterday, before Chairman Carl-Henric Svanberg is called to a White House meeting today to discuss paying damages to Gulf of Mexico residents. BP, which had $27.7 billion in cash flow from operations in 2009, was cut six levels to BBB from AA by Fitch Ratings because of mounting costs from the well that’s spewed crude into the water for eight weeks.

“There’s still so much uncertainty as to what ultimately the liability is and what the government is going to do,” said Jason Chen, a partner and head of research at hedge fund Sancus Capital Management in New York, founded in August by former JPMorgan Chase & Co. traders.

BP’s $750 million of 1.55 percent notes due in 2011 dropped 2.1 cents to 92.25 cents on the dollar yesterday, the lowest on record, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds traded the most ever, according to data compiled by Bloomberg. .........(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=adIzt1crDMFw&pos=1

[Statistical]

1. The slightly more accurate headline would be. Casino is betting on SLIGHT chance of BP Bankruptcy.

"BP swaps climbed 112 basis points today to a record 618."

100 basis points per 1%. So 618 basis points = 6.18%.

The insurance premium on a BP bond has risen to 6.18% annually or 39% over next 5 years.

Thus the annualized break even probability is in BP risk on bankruptcy is 6.8%.
If it is higher than the seller of swap is underpricing it.
If it is lower than the buyer of the swap is overpricing it.

More interesting stats:

Inverted Yield Curve

BP’s shorter-term borrowing costs are rising in a signal lenders are increasingly concerned they may face losses. BP notes due in 2011 yield 154 basis points more than the company’s 4.75 percent bonds due in 2019, Trace data show. The shorter- maturity debt yielded 326 basis points less as of April 29.

Investors typically demand additional yield on shorter- maturity debt when risk is concentrated in the nearer term, causing the so-called yield curve to invert.

The yield curve is indicating that the risk of default is concentrated in the near term. If the bonds are trading "rationally" then BP will either default in short term or remain cashflow positive into long term (post 2019).

[LeftyFingerPop]

4. Are you the person who bought BP at 50? If so, are you still holding? n/t

[Statistical]

6. No.

I don't understand why the concept of a trade is so hard for people.
I had a hypothesis. I executed it. I put in a tight stop. It didn't work.

BP was less than 5% of my portfolio and I lost 7% (2% of which I will get back when BP pays out dividend on June 21st).

Still that doesn't make the facts of my post any less accurate.

[LeftyFingerPop]

7. I simply asked a question. (see edit)

Don't be so defensive.

I understand trades and stops just fine.

Edit: Removed last sentence. i was wrong about that. Sorry.

[Statistical]

13. If the question was in good faith than sorry about the over reaction.

:)

[dixiegrrrrl]

15. Maybe you can help with this question.

Yesterday the news reported BP had hired Goldman Sachs and Blackrock.
Did not say why.
Any idea why?

[Statistical]

17. Not sure. My guess....

Most companies don't wait until they are out of money and landlord changes the locks before hiring BK firm.

My (totally outsider guess) is they are hiring GS for:
a) restructure company to minimize and isolate the stricken Gulf division
b) look into bankruptcy options, plans, costs vs benefits
c) something else evil. GS is the best in the world when it comes to evil.

[dixiegrrrrl]

18. All 3 seem about right.

And of course BP will gladly spend money on GS and Blackrock, instead of on the spill.
Sheesh.

[Statistical]

19. Blackrock is less insidious than GS.

Blockrock does some corporate bond work. BP also owns a lot of equities & bonds (assets). May be looking to use Blackrock to unwind those to free up some cash. Also could be some kind of alternative financing to generate cash for future oil profits.

Goldman on the other hand is likely trying to figure out a way they can sue Gulf residents for stealing BP oil. :(

[Scuba]

2. How about "Wealthy Cut and Run, Leaving US Taxpayers with the Bill"

We can't collect anything from a bankrupt company.

[no_hypocrisy]

3. More derivatives . . . . . . *Groan!*

[Barack_America]

5. This shit is still legal?!?!

:grr:

[RB TexLa]

8. Why wouldn't CDS be legal?

[Barack_America]

9. There was this whole international financial crisis a while back...

...caused largely by credit default swaps.

[RB TexLa]

10. There were many people run over by cars a while back

why would they be legal?

[Barack_America]

12. I would imagine the drivers would have their licenses revoked, yes.

Particularly if they intentionally ran people down.

[Odin2005]

11. This shit disgusts me.

[FLPanhandle]

14. Actually, Wall Street & Banks probably are our best indication of how bad this thing is.

We've all seen the worst case stories, but if ths stock is up and bankers aren't nervous, then I tend to ignore those projections.

When Wall Street starts panicing, then this gusher is going to go on for a long time.

Like them or not, they have the real scoop and it's informative to watch them.

[Blue_Tires]

16. the house always wins....