Analysis: BP commercial paper market access could be curt

NEW YORK (Reuters) - Oil company BP is now in danger of losing access to the commercial paper market, with one rating agency downgrading its short-term rating and another threatening to do so.

Were a second major agency to follow Fitch's steep ratings cut of BP on Tuesday, the company's ability to fund itself through the commercial paper market would be curtailed because of ratings rules for U.S. money market funds investing in that debt.

A BP press officer declined comment.

Commercial paper, a form of very short term corporate debt, is a vital source of funding for company routine operations.

Fitch Ratings downgraded BP plc's long term debt rating to BBB from AA and left the rating on "watch evolving", citing the costs of the oil spill in the Gulf of Mexico and the increased risk BP would have to place sums in an escrow account.

Fitch downgraded the short-term rating to F3 from F1-plus.

A second major rating agency may also cut BP.

S&P's rating for BP's short dated paper is A-1-plus, but it was put on review for a downgrade on June 4.

In gradings of short term debt, if a company loses its first tier A-1 / P-1 / F-1 ratings from two out of three of the big credit rating agencies, this substantially limits money market funds from buying that company's newly issued commercial paper.

"For an issuer there would be much more restrained demand for new paper," said Roger Merritt, head of Fitch's fund and asset manager ratings group in New York.

"The risks for the company have increased significantly," said Brian Gibbons, senior oil and gas analyst at CreditSights in New York. "It's only natural that bond investors are going to be demanding higher yields, and that applies to commercial paper."

BP's overnight commercial paper rates have risen to between 0.45 and 0.55 percent on Tuesday according to indicative offered levels, from about 0.35 to 0.45 percent a month ago, said Sean Simko, fixed-income portfolio manager with investment management company SEI in Oaks, Pennsylvania.

Before the oil drilling rig explosion in April, BP's commercial paper rates were typically less than 0.20 percent Simko added.

"Being shut out of the markets, I don't see that, but they will have to pay higher rates," Gibbons said.

If the company's short term debt were to lose its top tier rating from Standard & Poor's, then "money funds generally would not be buying them," Simko said. "The lower your rating, the lower your investor base," he said.

Under recently introduced rules to try to limit risk taking, U.S. money market funds are prevented from holding more than 3.0 percent of their portfolios in second tier securities, defined as those with lower than A-1 / P-1 ratings for short term paper, said Mike Krasner of the Money Fund Report.

As of the end of March, BP's short term debt outstanding due in less than one year was about $8.4 billion, while its debt due in more than one year totaled about $23.8 billion, according to a company spokesman in London. A breakdown indicating how much of that short term debt was six-months or less -- the standard definition of commercial paper -- was not given.

(Additional reporting by Alex Chambers in London)