Yesterday it was reported at The Markets Are Open on the great mistake by Fitch Group. Fitch Group is one of the big three credit rating agencies on Wall Street along with Standard and Poors and Moody's. Yesterday, Fitch cut BP's credit rating 6 notches from AA to BBB. A kind of cut that is unheard of. Today, it was reported BP will withhold their declared dividend payment. As well as cut capital expenditures (Cap Ex) by essentially the exact amount speculated here yesterday of around 4 billion over 2 years. BP also plans to sell 10 billion of Assets.
BP is only committed to put 5 billion in the government escrow account this year and only is required to put 1.25 billion in the fund per quarter until the account reaches 20 billion. Theoretically this means it can take until 2015 before BP has paid the 20 billion in this account.
It is likely with rising oil prices that BP's Net Income will be between 80-100 billion or even higher from now until 2015. BP may thus be able to survive the disaster without a huge hit to their equity and may continue to be able to grow their business during this time. The government has structured the payout very favorably towards as it has allowed BP a slower then nature of making payments. BP is able to pay the money over time and not in an all for one hit which could have been more devastating.
It is likely the government will be paying for almost all of the current costs of the cleanup and BP will pay them back over time. This allows BP a lot of time to generate the cash flow required. It is important to realize that the current developments do not cap BP's liability, but today can give us a clear glimpse in how easy it is for a cash cow like BP to pay 20 billion dollars.
We again contacted CEO of Fitch Stephen W. Joynt of Fitch Group. He has yet to respond.
Showing posts with label Fitch. Show all posts
Showing posts with label Fitch. Show all posts
Wednesday, June 16, 2010
Tuesday, June 15, 2010
Fitch Group's Error of Commission
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.
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.
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