http://www.bloomberg.com/apps/news?pid=20601087&sid=akLiysG_VLJQ



BP Plc’s credit rating was cut six levels to two above junk by Fitch Ratings on concern over the
potential cost of cleaning up the Gulf of Mexico oil spill and
meeting future liabilities.

BP’s long-term issuer default and senior unsecured ratings were lowered to BBB from AA, Fitch said in a statement today. That follows a reduction from AA+ on June 3.

President Barack Obama and U.S. lawmakers said this week that BP should suspend dividends and set aside funds now for legal claims against the company from the spill, the worst in
U.S. history. Fitch said it would be “surprised” if BP didn’t
suspend the quarterly payout until the full costs are known. The
cost of cleanup and liabilities may reach $40 billion, Standard
Chartered Plc. estimated last week.

“The recent claims by U.S. state and federal authorities that BP escrow significant sums preemptively, ahead of any agreed claims process, represent a material change in
approach,” Fitch said in a statement. BP has about $23 billion
of debt outstanding, Bloomberg data show.

BP fell 3.8 percent to 342 pence in London, the lowest since April 1997, after earlier rising as much as 2 percent.

Borrowing Costs

BP’s cost of borrowing is greater now for the short term than for longer periods, a signal lenders are concerned at the possibility of incurring losses on their credits.

Investors demand more yield to compensate them for an expected loss in the short term because a decline in the value of a long-term investment can be spread out over a greater
period. The result is that the so-called yield curve inverts as
yields on short-term bonds rise.

The yield premium investors demand to hold BP’s $1.5 billion of 3.125 percent bonds due 2012 rather than similar- maturity government debt jumped 114 basis points to 730 basis
points, according to Trace, the bond-price reporting system of
the Financial Industry Regulatory Authority.

The spread on its $1 billion of 4.75 percent notes due 2019 increased 48 basis points to 378 basis points, according to Trace.

BP five-year credit-default swaps surged 39 basis points to 476.5 after today’s ratings downgrade, according to CMA DataVision. Contracts covering the company’s debt for one year
were at 579 basis points, according to CMA.

Senate Majority Leader Harry Reid yesterday requested that BP set aside $20 billion in a fund to be administered by an independent trustee to speed up the claims process for victims
of the spill.

Changed Outlook

Fitch changed the outlook on BP to “evolving” from “negative.”

BP had $5 billion of cash available, $5.25 billion of bank credit lines it hadn’t used and another $5.25 billion of stand- by bank facilities, according to Fitch, which cited a June 4
investor call. Fitch said it expects BP’s lenders to allow the
company to use the credit lines if needed.

Moody’s Investors Service rates BP debt at Aa2, the third- highest investment grade, and Standard & Poor’s has it at AA-, seven grades above the highest non-investment ranking. S&P
downgraded BP by one level last week. Moody’s and S&P, both
based in New York, declined to comment.