By Abigail Moses and Pierre Paulden June 17 (Bloomberg) -- BP Plc’s agreement to cut three quarters of dividend payments and set up a $20 billion fund for oil-spill victims removed the energy producer from a four-hour stint among companies the bond market labels distressed. BP’s $750 million of 1.55 percent notes due 2011 rose 2.25 cents to 94.5 cents on the dollar, after tumbling as low as 87.9 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The cost of protecting BP’s debt against default for one year fell 521 basis points to 476, after climbing to as high as 1,075 yesterday, CMA DataVision prices show. Spreads on bonds and default swaps tightened after BP slashed the $10 billion-a-year dividend and agreed to create an escrow fund to pay damages for the biggest oil spill in American history following a meeting with President Barack Obama. Its bonds still traded at levels similar to junk-rated debt in the U.S. yesterday, at least seven steps below the AA- rating from Standard & Poor’s. “There has been a run-up in credit-default swap spreads that had created some uncertainties in the minds of debt holders,” BP Chief Financial Officer Byron Grote said yesterday in a conference call with investors and analysts to discuss the reduced dividend and victims’ escrow account. “This will create a calming effect.” Pimco’s Gross Buys BP bonds were the most active in U.S. trading yesterday, Trace data show. The manager of the world’s largest bond fund, Bill Gross, recently bought $100 million of shorter-maturity BP debt, Pacific Investment Management Co. spokesman Mark Porterfield wrote yesterday in an e-mail. Gross, co-chief investment officer at Pimco in Newport Beach, California, also bought notes of The Woodlands, Texas- based Anadarko Petroleum Corp., owner of a 25 percent stake in the well that has been spewing oil into the Gulf of Mexico since April 20. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt was unchanged at 198 basis points, or 1.98 percentage point, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 4.114 percent. Bank of America Corp., the largest U.S. bank by assets, sold $1.25 billion of bonds backed by auto loans after boosting the offering’s size by 25 percent. The biggest top-rated portion of the debt, a $481 million slice maturing in almost two years, yields 20 basis points more than the benchmark interest rate, according to a person who declined to be identified because terms aren’t public. GMAC Issue GMAC Inc.’s Ally Bank is marketing $792.3 million of securities tied to car loans that may be sold as soon as tomorrow. Korea Housing Finance Corp., the state-run residential funding provider, is planning Asia’s second sale of covered bonds after Kookmin Bank opened the market last year. The company scheduled meetings with investors around the world starting June 21, according to a person familiar with the matter, who asked not to be identified because the talks are private. A benchmark-size sale of dollar-denominated notes may follow, the person said, using a term that typically means at least $500 million. Covered bonds, mostly sold by European banks, attract higher ratings than regular notes because they’re backed by assets such as mortgages that stay on the lender’s balance sheet and that can be sold in the event of a default. Junk Bonds Remy Cointreau SA, France’s second-largest liquor company, hired Credit Suisse Group AG and Credit Agricole CIB to organize meetings in Paris with high-yield debt investors to propose what may be Europe’s first junk-bond sale in more than a month, according to two people with knowledge of the matter. A sale would be the first below-investment grade issue since brake-pad maker TMD Friction Holding GmbH raised 160 million euros ($196 million) on May 14, according to data compiled by Bloomberg. High-yield debt is rated below Baa3 by Moody’s Investors Service and BBB- by S&P. DynCorp International Inc., the Falls Church, Virginia- based security services company that Cerberus Capital Management LP is buying for $1.5 billion, set initial pricing guidance for a $565 million six-year term loan financing the purchase. The borrower may pay 475 basis points more than the London interbank offered rate, with a 1.75 percent Libor floor, according to a person familiar with the negotiations. Libor is the rate banks say they’re charged to borrow from each other. Default Swaps The cost of insuring against losses on European corporate bonds fell, with the Markit iTraxx Crossover Index of credit- default swaps on 50 mostly junk-rated companies declining 14 basis points to 548, according to Markit Group Ltd. That’s the lowest level in almost a month. The index typically falls as investor confidence improves and rises when it deteriorates. Credit-default swaps on Spain’s debt dropped 11 basis points to 248 after the government sold 3.5 billion euros of bonds at below prevailing interest rates. Contracts on Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, the country’s two biggest lenders, also dropped. Spain sold 3 billion euros of 10-year debt at an average yield of 4.864 percent. Demand was 1.89 times the amount on offer. It also issued 479.2 million euros of 30-year debt at 5.908 percent, with a bid-to-cover ratio of 2.45. The nation raised the maximum amount it was seeking from the auction. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. ‘Deeply Sorry’ BP Chief Executive Officer Tony Hayward said he’s “deeply sorry” for the Gulf rig explosion before testifying before Congress today. BP shares jumped as much 9.7 percent, the biggest intraday gain since November 2008, before levelling off at a 7.8 percent rally to 363.25 pence by 11:15 a.m. in London. The company fell 1.5 percent yesterday to 337 pence, the lowest since April 1997. Credit-default swaps to protect against non-payment on the company’s debt for five years tumbled 180.5 basis points to 395, according to CMA. That’s lower than the price of one-year swaps, creating a so-called inverted yield curve, an indicator of greater short-term risk. BP’s European bonds rose, with the spread on its 1 billion euros of 4.5 percent notes due November 2012 narrowing to 555 basis points, from 696 basis points yesterday, according to HSBC Holdings Plc prices on Bloomberg. The yield premium on the 500 million pounds ($733 million) of 4 percent bonds due December 2014 was at 410 basis points, from 411 basis points. Asset Sales BP will increase asset sales to $10 billion from between $2 billion and $3 billion, according to bond analyst Philip Adams at Gimme Credit LLC in Chicago. The “cash conservation moves” over the next year are about $16 billion to $18 billion, compared with an escrow obligation of about $7.5 billion, he wrote in a note to investors. “We are quite pleased with the outcome of BP’s discussions with the Obama administration,” Adams wrote. Still, BP debt investors are concerned the company, one of the world’s largest energy traders, will face a cash squeeze from liabilities for and potential collateral calls on its oil and currency trades. BP had $6.84 billion in cash and near-cash as of the end of the first quarter, according to a regulatory filing. Risk Management BP uses derivatives to hedge its exposure to energy price swings and to take proprietary positions, according to its 2009 annual report. “The contracts may be entered into for risk management purposes, to satisfy supply requirements or for entrepreneurial trading,” the company document says. The extra yield investors demand to own BP’s notes due August 2011 instead of similar-maturity Treasuries reached as high as 1,257 basis points in New York yesterday, before falling to 591 basis points, Trace data show. They traded at 804 basis points June 15. Spreads of more than 1,000 basis points are considered distressed. The average spread for companies rated in the highest tier of speculative-grade is 527 basis points, according to Bank of America Merrill Lynch index data. “The danger is BP might run out of cash,” said Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London. “Much will depend upon its relationship and contractual agreements with its bankers but if it gets through the next 18 months, it probably will survive.” BP Derivatives BP’s largest category of derivatives is related to natural gas prices, followed by contracts based on oil prices. The company also has exposure to currency and interest-rate derivatives. “I’m not aware we’ve had to scale back trading,” said Toby Odone, a BP spokesman. Spreads on BP bonds narrowed 52 basis points yesterday to 601 basis points, according to Bank of America Merrill Lynch index data. The bonds have lost 13.4 percent this month. Anadarko’s $1.75 billion of 5.95 percent notes due in 2016 rose for a fourth day, climbing 0.25 cent to 87 cents on the dollar yesterday, Trace data show. The bonds are off from their high this year of 111.3 cents on April 22. Bonds of Transocean Ltd., owner of the Deepwater Horizon rig in the Gulf, fell for the first time in four days. The Vernier, Switzerland-based company’s $1 billion of 6 percent debt due in 2018 dropped 2.06 cents to 86 cents on the dollar yesterday. The debt traded as high as 118.8 cents on Feb. 1. To contact the reporters on this story: Abigail Moses in London at amoses5@bloomberg.net; Pierre Paulden in New York at ppaulden@bloomberg.net

Source