When British Petroleum (Stock Quote: BP) agreed to a $20 billion fund for damages caused by the Deepwater Horizon oil spill, it wasn’t going to pay the money directly out of pocket. Instead, it would do what most individuals can’t do in times of financial stress — get help from big banks.
After all, there is a precedent. Exxon (Stock Quote: XOM) did the same thing back in 1996 when it set up a fund to pay for damages linked to the Exxon Valdez oil spill in Alaska.
So everything old is new again as BP has opened $7 billion in lines of credit from several European banks, according to Reuters. According to the deal the oil giant cut with the White House, BP only has to pay out $5 billion in 2010 to local businesses affected by the oil spill, like shrimp fishermen and hotel and resort owners. It has already paid out about $2.35 billion in cleanup costs and, long-term, the company could face up to $15 million in fines and penalties stemming from infractions related to the Clean Water Act, Reuters reports.
BP has become especially reliant on banks to raise the money needed to cover costs associated with the massive oil leak. It really can’t raise too much money from its stock, which has shed $100 billion in value since the April 20 explosion that triggered the oil spill. BP stock is now trading at levels last seen in 1996, and is down 26% for the month of June alone. The company did sell $10 billion worth of assets, and has announced plans to suspend its dividend for three quarters to shore up more cash reserves to cover the financial costs of the spill.
So which banks are lining up to loan money to BP? That list reads like a “who’s who” of global financial giants: Barclays (Stock Quote: BARC), HSBC (Stock Quote: HSBC) and Royal Bank of Scotland (Stock Quote: RBS). According to Reuters, BP has “asked its main lenders to put a series of coordinated one-year standby bilateral loans in place, one source said. This type of loan is made by individual banks to a company and are not syndicated.”
While BP could raise even more money through bond offerings, the thinking goes that, given its recent downgrade from Fitch Ratings, it’s cheaper to borrow money from big banks. On June 15, Fitch cut BP’s bond rating from an AA-level to a BBB rating. That’s just two notches above a "junk" rating, Fitch reports.
The bond rating cut stems directly from a steady stream of bad news related to the spill. "The principal changes (include) the indication late last week from U.S. government scientists of a significantly higher spill rate than previously announced," Fitch said.
Banks figure that BP will eventually emerge from the spill intact, or as a buyout target. Either way, banks figure that the company is a good credit risk and are more than willing to back the company financially as it fights the worst ecological disaster in U.S. history.
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