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Gulf oil spill: BP woes continue with another debt downgrade

June 15, 2010 |  1:58 pm

Fitch Ratings analysts delivered another blow to beleaguered oil giant BP on Tuesday when they downgraded the rating on the company's long-term debt to just above junk status. Specifically, it was BP's long-term issuer default rating and its senior unsecured rating that took the hit, falling to BBB from AA. Less than a month ago, Fitch had reduced those debt ratings to AA from AA+.

Fitch analysts Jeffrey Woodruff, in London, and Erwin Van Lumich, in Barcelona, said in their report that the downgrades were made because of the risks that BP might face from unexpectedly large costs if the company is forced by the Obama administration to produce billions of dollars upfront in some kind of emergency escrow account for damage claims from the massive oil spill in the Gulf.

"The scale of today's rating action has been partly driven by the increased risk that the balance between long term and short term cost payment may now be skewed much more heavily toward the near term," Woodruff and Lumich wrote.

Other factors, the Fitch analysts wrote, were indications that significantly more oil may have leaked from the crippled well than previously anticipated, which could increase the likelihood of "BP's exposure to Justice Department fines payable in the near to medium term."

Fitch also lowered BP's short term issuer default rating to F3 from F1. BP Capital Market, a subsidiary of BP, also saw its senior unsecured issues downgraded to BBB from AA.

Some oil experts called the development worrisome.

"What it indicates is that if there is a dispute over a disaster like this, the federal government can make you put up a fund and pay for damages that you may not agree with and that's a troubling development for the oil industry," said Phil Flynn, an analyst for PFGBest Research in Chicago.

-- Ronald D. White