Colin Barr

Following the money in banking, economics, and Washington

Will the rating agencies buy BP's plan?

June 16, 2010: 4:21 PM ET

Shareholders liked BP's decisions Wednesday. But a bigger question is how the rating agencies will take the news.

Mollifying President Obama and restive shareholders isn't the only task for the oil giant's chairman, Carl-Henric Svanberg (right, with Obama).

Now he and his minions must court the rating agencies. Both Moody's and Standard & Poor's downgraded BP (BP) earlier this month, saying massive legal and cleanup costs from April's gulf coast oil spill would weigh on the firm's balance sheet. Both said further downgrades were possible. Fitch, a third rating agency, slashed BP's ratings Tuesday.

What will the small people think?

Though the rating agencies are widely mocked as useless, behind the times, and much worse, their opinions continue to carry weight in the court of market opinion. Another downgrade could further raise BP's borrowing costs and squeeze profits. That's why the firm said Wednesday it is in a "dialogue" with the raters.

So how Moody's and S&P take Wednesday's decision to cut the dividend and set up a $20 billion claims fund will have big implications for BP, whose shares rose 1% in afternoon trading.

Finance chief Byron Grote admitted in a conference call Wednesday afternoon that the ratings agencies loom over the firm's future.

"We have a double-A rating, and we believe a double-A rating is where a company like BP would be most logically positioned," Grote said. "But there has been a runup in credit default swap spreads in recent weeks that has created some uncertainties in the minds of debt holders."

Indeed, the cost of insuring Wednesday against a default on BP bonds remained near the past month's all-time high levels. It cost $591,000 annually to protect against default on $10 million worth of debt for five years, according to CMA. Before the spill, it cost $29,000.

Grote said he hoped Wednesday's plan would have "a calming effect" on the rating agencies, though he conceded that "it is up to them to decide whether the strengths of the BP group remains a double-A credit."

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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