As investors debate whether high-yielding BP bonds are a good buy, the cost of insuring against default on those bonds continues to set new highs.
BP bonds bounced, along with a temporary move higher in its stock , on news the company has agreed to set aside $20 billion in an escrow fund to pay claims from the Gulf of Mexico oil spill.
The credit-default swaps for BP bonds have risen to a record 627 today, and are now reflecting a 39.59 percent chance of BP defaulting or going bankrupt over the next five years, according to CMA Datavision. For perspective, before the April 20 collapse of its rig, the CDS were at 42.4, and the chance of default was put at 3.69 percent on April 19.
The New York Times was first to report that BP has tentatively agreed to the escrow fund, which will be run by Kenneth Feinberg, the mediator who oversaw the 9/11 victims fund.
BP Chairman Carl-Henrico Svanberg and Chief Executive Tony Hayward are meeting today with President Obama at the White House, discussing the fund and other issues surrounding the still-gushing oil spill.
Ahead of that meeting, BP bond yields were at record levels with the 2013s yielding 9.5 percent and a 1-year issue, yielding 11.65 percent. The yields for the 2013 slipped to 8.91 percent as buyers stepped in after the news.
"I've seen nothing but buyers today, a few sellers," said Andrew Brenner of Guggenheim Securities. Brenner has been a buyer of the bonds, even as their prices fell in recent days and yields rose.
Despite the selloff in the bonds, he continued to buy on his belief that BP will not go bankrupt. "I stand by it," he said.
"The $20 billion is as expected in the fact that BP doesn't have to fund it right away. It can take a significant amount of time. It won't be that much of a drain on the company and we seem to be going to higher oil prices, which should mitigate some of BP's pain," Bonner said.
The New York Times reported that BP would have several years to deposit the full amount into the fund so it could better manage cash flow.
More on BP:
- BP Collapse? Big Trader Bets 'Yes'
- Oil Spill's Next 'Collateral Damage': Regional Banks
- Obama Is Managing Gulf Crisis 'Horribly': Jack Welch
Track BP trading in London:
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