BP's Irreverisible Death Spiral - If You Own The Stock: Good Luck, But Good Night

Fitch today downgraded BP's credit rating by SIX notches, from AA- to BBB-, one notch above junk status. The bonds plummeted in price, catapulting the yields on BP solidly into middle junk bond range. I have to say, I spent nine years trading junk bonds on Wall Street and another 11 years following the market. I can't ever recall seeing a company receive a downgrade of this magnitude and not eventually go tits up.  I'm sure it's happened, but I can't think of an example. This is serious shit. Remember Enron? Fitch was the first credit rating agency to finally downgrade Enron debt, even though it had been apparent well before the downgrade that Enron was a zombie. Astonishingly, Moody's and S&P never downgraded Enron until just before it filed. We'll know how much whore and whiskey money BP has bestowed on those two rating firms based on how long it takes them to follow Fitch. I would bet whore and whiskey money that the scumbags at BP lobbied Fitch long and hard in order to avoid a downgrade to full junk status (yes this does happen and I've witnessed the process first-hand).

BP's debt plunged on this downgrade. According to this news report, it sounds like large blocks of BP paper were put out to the market on a "bid wanted" basis: Someone Please Buy My Bonds. What this means is that the market for BP bonds has become very illiquid and there are large institutions who will be forced to sell once the bonds get an official junk rating. Clearly the market sees this coming based on where the yields are now, and some big funds are hoping to beat the sell rush. This is the kind of activity we started to see in the spring/summer of 2008 as the credit collapse was developing.  Typically the bond market is a much better tool to use than the stock market in forecasting the direction of a company's solvency status.  Right now I would interpret the Fitch/bond market activity as putting a 50/50 probability on the likelihood of BP filing bankruptcy.

In addition, BP announced yesterday afternoon that it had hired Goldman, Blackstone and Credit Suisse for financial advisory services.  No doubt BP selected Goldman for its deep and extensive inside connections to the Obama Administration. Blackstone and Credit Suisse are big M&A and restructuring players. My bet is that BP wants to see what a hail mary play involving putting lipstick and a gown on the pig in order to auction it off might look like.

The fact of the matter is that I just can't see any Company in the world taking on the potential liability facing BP. As more and more information leaks out that Obama/BP are trying to cover up, it is looking like this blown well is taking on Armegeddon-like proportions. Yesterday an article appeared in the San Francisco Chronicle in which "a BP engineer described the doomed rig as a 'nightmare well,' according to internal documents released Monday." LINK.   And Clusterstock.com carried an article today in which Matthew Simmons, arguably the most respected oil industry analyst, professed that an attempted relief well will fail and that there is a possibility that a giant undersea lake may already be covering the floor of the Gulf: "The Road" in real life?

I have also had conversations with a couple people who have chatted with industry insiders. Independently, both offered the same type of assessment:  this situation is completely out of control and Obama/BP are trying to cover up as much of the truth as they can; there is no way BP has a shot at containing this - the pressure that has built up in the deep rock formations is much greater than the ability of available technology to contain; the well-head will likely be blown apart; fissures are forming on the Gulf floor from which oil is already leaking into the water (as described: "BP has cracked the earth with this well"); in addition to the obvious and immediate annihilation of the Gulf ecology and environment, if this problem develops into its full potential, the effect on the ocean will have a global effect on the atmosphere and the food supplied to the world by the ocean.

And in summary, I offer two rhetoricals: 1) In his Armageddon vision presented in "The Road," everyone assumes that a nuclear war had occurred, but author Cormac McCarthy never specifically identifies what happened; 2) Do you really still want to own BP stock?