BP Plc downgraded 6 Notches to BBB from AA
The Fitch Group is one of the big three Wall Street credit rating agencies together with Moody's and Standard & Poor's.
Today the company lost the rest of its tarnished credibility. Credit Rating agencies have been criticized for major mistakes such as having Lehman Brothers rated AA as the company went bankrupt. This was an error of omission. But today Fitch made a larger error an error of commission. They acted when they should not have. They downgraded BP Plc 6 notches to BBB.
Fitch states the downgrade is because of "Obama administration's insistence that claims being paid out of an escrow account."
After reading this one would probably come to the conclusion Fitch does not know what an escrow account is. An escrow account is a holding account. In this case it is set up in case BP civil claims against them exceed their ability to payout their dividend. If anything this makes BP financial position stronger as they will now have 3 billion more in liquidity. BP's credit rating should have been raised or not touched on this news.
On top of this Fitch estimated total costs for BP at a high range of 17 billion. And state that they do not believe BP will go bankrupt. Well isn't that reassuring
Fitch can triple their estimate of damages to 51 billion and BP will still be able to survive. Make it 80 billion and BP likely still has the liquidity to survive.
At 51 billion claims BP can easily survive as shown below.
-51 High estimate in claims
+30 billion of Cash flow from operating activities
-16 Reduce Investing activities to 16 billion from 20 due to risk
0- No more Dividends paid in 2010 or the foreseeable future
+16 Issue 16 billion dollars of stock or debt 320 million shares at $25 and 8 billion of debt
+6- Use 6 billion of Cash already on the Balance Sheet
+15- Convert Accounts Receivable into Cash and use it to pay for damages
Sell Property Plant and Equipment
New Liability 0
This covers all the costs. And this leaves out BP's backpocket maneuver of selling Property Plant and Equipment. BP has 231 billion of Property Plant and Equipment and they have ample ability to sell parts to raise cash.
On top of this BP has a very little amount of debt and they can easily issue more to fund the liability or issue more shares than the amount specified above. However, if the share price drops too low or interest rates are too high selling property plant and equipment would become the number one option.
A prepackaged bankruptcy to avoid liabilities is impossible since shareholders know BP can afford the claims and it would violate a fiduciary duty of BP to eliminate sharehowners to avoid a liability. Shareholders would not stand for it.
This is a giant error by Fitch.
CEO of Fitch Stephen W. Joynt has been contacted. He did not respond.